At least 16 people have been killed and up 100 others have been injured by a suicide bomb on a bus in central Jerusalem, according to police.
A website which is linked to Hamas and regularly publishes official statements from the group said in a statement that the Jerusalem bombing was carried out by Hamas' Izz-el-Deen al-Qassam military wing. It said the suicide bombing showed Palestinian groups could strike "when and where" they wanted.
Within an hour of the bombing, Israel launched a retaliatory missile attack in Gaza City. Seven Palestinians were killed when a helicopter fired two missiles at a car in the Shajayah neighbourhood, Palestinian medical and security sources said.
Two Hamas militants - Tito Massoud (35), and Soffil Abu Nahez (29) - were killed along with five other people in the air strike. Around 20 people were wounded.
Police said the Jerusalem explosion was triggered by a suicide bomber, dressed as an Orthodox Jew, stepped on the bus when it was stopped at a major intersection, near the entrance of Mahane Yehuda, Jerusalem's outdoor market, which has frequently been targeted by militants in the past.
The blast on Jaffa Street, Jerusalem's main thoroughfare, was heard across the city and ambulances raced to the scene. It blew out windows and tore a large hole into the left side of the bus, which had just left Jerusalem's nearby central bus station when the explosion went off.
The explosive charge reportedly contained bolts and nails, accounting for the high death and injury toll. Thirteen of the victims were killed on the spot when the bus stopped at a busy intersection in front of a shopping mall, while three more died of their wounds in hospital or on their way there, medical and police sources added. Four wounded were reported in critical condition.
"The bus was torn to shreds. There was a massive blast, it's a horrific scene," said one witness, quoted by the radio.
There was no immediate claim of responsibility. But the Islamic militant group Hamas has threatened to take revenge for a botched attack by Israel on one of its leaders, Mr Abdel Aziz al-Rantissi, yesterday. The Israeli government admitted its forces tried to eliminate Mr al-Rantissi in a helicopter raid on Gaza City.
CNN quoted Mr al-Rantissi today as saying the Jerusalem explosion was "an answer" to Israeli Prime Minister Mr Ariel Sharon, who yesterday promised to continue his campaign against Palestinian militants.
However, Israel insisted the suicide bombing was not a consequence of the assassination attempt. "Even before there was any attempt at al- Rantissi we had an unprecedented wave of terrorist attacks planned and perpetrated," Mr Sharon's spokesman told CNN.
A White House spokesman said US President George W. Bush condemns the Jerusalem attack "in the strongest possible terms". Yesterday's attempted assassination of Mr al-Rantissi also drew a strong rebuke from the US president.
The new cycle of bloodshed threatened to wreck a US-backed peace plan which was launched just a week ago by Mr Bush during talks with Israeli Prime Minister Ariel Sharon and Palestinian premier Mr Mahmoud Abbas in Jordan.
The plan - known as the "road map" - had created a rare glimmer of hope after 32 months of Israeli-Palestinian violence.