A woman suicide bomber has killed herself and at least 19 other people at a restaurant in the northern Israeli port city of Haifa.
It is one of the deadliest suicide attacks in three years
At least four children were among the dead, and up to 50 other people were injured.
The explosion wrecked a popular seafront restaurant, which has been jointly run by a Jewish and an Arab family for decades.
The Palestinian militant group Islamic Jihad has claimed responsibility for the attack, which came just before the holiest day in the Jewish calendar, Yom Kippur.
Israeli Prime Minister Ariel Sharon held an an emergency meeting with his advisors. He has been facing calls to carry out the government's threat to "remove" the Palestinian leader Yasser Arafat.
Mr Arafat, who remains in his Ramallah compound, has condemned the bombing and called for a mutual ceasefire. But Israel blames the Palestinian Authority for failing to disarm militant groups.
Reports from Gaza City late on Saturday say Israel has launched air strikes in apparent response to the Haifa attack.
The reports quote eyewitnesses who say Israeli helicopters fired two rockets in the city.
Palestinian sources said the suicide bomber was a trainee lawyer, whose brother was was shot by Israeli troops at his home in Jenin in June.
Arafat under pressure
The BBC's Orla Guerin in Jerusalem says this is one of the deadliest attacks in the past three years, and it brings the Middle East to a critical moment.
Health Minister Dan Naveh said the attack presented an "opportunity to implement the cabinet decision to get rid of Arafat".
The cabinet had made the threat last month after 15 people were killed in twin suicide bombings in Jerusalem and Tel Aviv.
However, our corrspondent says Israel would need a green light from the United States, something Washington has refused in the past.
In another development on Saturday, Israeli forces killed a Palestinian militant wanted for an attack last year which killed five Israelis.
Sirhan Sirhan - a member of the al-Aqsa Martyrs Brigades - was killed in the West Bank town of Tulkarm, Israeli officials say.
In the restaurant attack, the suicide bomber shot dead a security guard at the entrance before rushing into the restaurant, which was packed with lunchtime diners.
"There was a very big explosion, which blew out the windows. It was horrible," a witness told Israeli TV.
The Palestinian Prime Minister-designate Ahmed Qurei condemned what he called "an ugly attack" and is reported to have telephoned Haifa Mayor Yona Yahav to express his sorrow.
RECENT SUICIDE ATTACKS
9 September: 15 killed in Jerusalem and Tel Aviv
19 August: 23 killed in Jerusalem
11 June: 17 killed in Jerusalem
18 May: 7 killed in Jerusalem
5 March: 17 killed in Haifa
He urged Palestinian groups "to fully halt these actions that target civilians and harm our legitimate and just national struggle," his office said in a statement.
US President George W Bush called the attack a "despicable" act that underlined the need for the Palestinian leadership to combat terrorism.
UK Prime Minister Tony Blair said such bombings did not serve the interests of the Palestinian people.
European Union foreign ministers, meeting in Rome, expressed their "deep consternation".
The bombing came as Israel imposed a total closure of the West Bank and Gaza Strip for Yom Kippur - the day of atonement - which runs for 24 hours from Sunday evening.
The Israeli military said the closure of the Palestinian territories was justified in view of the heightened risk of attacks by militants.