At least 17 people have been killed by a suicide bomber on a bus in central Jerusalem, Israeli police have said.
The attack happened during rush-hour
Dozens of people were injured in the blast, which happened during rush-hour on one of the city's main thoroughfares.
About an hour after the explosion, an Israeli helicopter gunship fired missiles at a car in Gaza City, killing at least six people, Palestinian medical sources said.
The Palestinian militant group Hamas said it carried out the Jerusalem bombing.
The group had vowed to avenge an Israeli missile strike on a car carrying its political leader, Abdel-Aziz al-Rantissi, in Gaza on Tuesday.
US President George W Bush said he "strongly condemned" the Jerusalem bombing, and called on countries to cut off funding to Hamas.
ROADMAP'S PATH TO CRISIS
4 June: US-Jordanian-Israeli summit in Aqaba
8 June: Hamas attacks Gaza army base, kills four soldiers
10 June: Israeli attempt to kill Hamas leader Rantissi
11 June: Suicide attack on Jerusalem bus; Israeli missile strike on Gaza
Palestinian hospital sources said a senior member of Hamas, Tito Massoud, and another Hamas member were killed in the Gaza missile strike, as well as four passers-by.
The bus exploded on Jaffa Street, the scene of several such blasts in the past.
The bomber, who was reportedly disguised as an ultra-Orthodox Jew, detonated a device packed with nails and metal fragments, police said.
The blast blew out the windows and tore the roof off the bus, which was heading towards Jerusalem's Old City.
One witness told Israel radio: "The bus was torn to shreds. There was a massive blast, it's a horrific scene."
The BBC's James Reynolds, who went to the scene of the blast, said there was a very angry mood among hundreds of people who had gathered there.
Israeli Prime Minister Ariel Sharon said he would continue to pursue Palestinian militants "to the fullest extent", while making every effort to move forward on the diplomatic process.
Palestinian Prime Minister Mahmoud Abbas - also known as Abu Mazen - condemned the "terrorist attack" in Jerusalem and called for a ceasefire by all sides.
In Gaza, an Israeli helicopter gunship fired at a car as it was stopped in heavy traffic, witnesses said.
"Two missiles hit the car. I stopped my car to help them but the Israeli helicopters fired four more missiles at us," a Palestinian who was wounded in the attack told the AFP news agency.
"When they took the bodies out of the car, I cannot tell you how they looked. It was terrifying," said another eyewitness who was among the first people to rush to the scene.
Soon afterwards hundreds of angry Palestinians crowded around the still-burning wreckage of the car, chanting for revenge.
Two women were among the dead, and about 20 people were wounded.
It was the third Israeli missile attack against Palestinian targets in Gaza in the past 36 hours.
State of alert
Israel was on high alert after Hamas promised an "earthquake" of retaliation for the attack on Mr Rantissi in Gaza City.
President Bush said he had been "troubled" by the Israeli strike on Tuesday, which left Mr Rantissi and his son wounded and two people dead.
Israel has defended its actions, saying Mr Rantissi was behind suicide bombings and a deadly ambush of Israeli soldiers last Sunday.
Palestinian leaders and left-wing Israelis say the attack - and another which followed hours later killing three members of the same family - were intended to undermine US-led efforts to revive the peace process
You can put your questions to a Middle East expert and a BBC correspondent in a LIVE interactive forum on Thursday, 12 June. Send your questions now using the form below.
Disclaimer: The BBC may edit your comments and cannot guarantee that all emails will be published.