Sixteen people have been killed in suicide bombings on two buses in the southern Israeli city of Beersheba.
The buses are said to have been full of parents and children
Two bombers also died and dozens of people were injured, some of them seriously, in the blasts that occurred two minutes apart.
Palestinian militant group Hamas later claimed responsibility for the attacks.
Prime Minister Ariel Sharon convened an emergency security cabinet meeting to plan Israel's response, vowing to pursue "the struggle against terror".
The cabinet is reported to have ordered the sealing off of the West Bank town of Hebron, from where troops surrounded the family homes of the two 22-year-old men named as the bombers by Hamas.
Recently lifted trade restrictions were also to be reinstated, reports said.
In the past, homes of suicide bombers have been destroyed by Israeli forces as punishment for such attacks.
The twin bombings are the first major suicide attacks in Israel since March, when 10 people were killed in the southern port of Ashdod.
The two buses were 100m apart when the blasts occurred, setting one on fire.
Yaacov Cohen, the driver of the second bus to be attacked, said: "I was at the junction and suddenly I heard a huge blast and saw smoke everywhere.
"I realised it was an explosion on a bus near me, so I stopped my bus and opened all the doors thinking, 'We should just flee'. Suddenly there was another blast inside my bus.
"When I opened the doors, a lot of people managed to get out... It's difficult to describe what I saw outside," said Mr Cohen, who was slightly wounded in the attack.
Ambulance worker Avi Zohar told the BBC that the buses were full of parents and children shopping for school items on the final day of the summer holidays.
Correspondents say the attacks were timed to cause maximum casualties, and that children are among the dead.
Soon after the two explosions, Israel radio and television reported that there had been a third blast in Beersheba, but this was later found to have been a false alarm.
In a leaflet issued in Hebron, the closest Palestinian town to Beersheba, Hamas said it was
avenging the assassinations of two of its leaders - Abdel Aziz Rantissi and Sheikh Ahmed Yassin - earlier this year.
Palestinian cabinet minister Saeb Erekat said: "The Palestinian Authority condemns any attacks that target civilians, whether Israelis or Palestinian."
He also appealed to the international backers of the stalled roadmap peace plan for the region "to intervene immediately" to bring peace to the region.
However one of those backers, the United States, rebuked the Palestinian Authority.
"Palestinian leaders must take immediate, credible steps to end
terror and violence," state department spokesman Richard Boucher said.
"The time for excuses has long passed. We need to see
actions that send a clear message that terrorism will not be
Suicide bombers have killed hundreds of people
in Israel since the start of the of the Palestinian uprising nearly four years ago.
The Israeli authorities say the construction of a security barrier in the West Bank, and repeated raids against suspected militants, have helped to prevent attacks in recent months.
Israeli officials noted that construction of the barrier had not yet reached Hebron.
Before the blasts, the Israeli army reported that troops had captured a suicide bomber at a Gaza Strip checkpoint before he could detonate an explosives belt hidden beneath his clothing.
Tuesday also saw Mr Sharon present a new timetable for his controversial plan to withdraw troops and settlers from the Gaza Strip.
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