A Palestinian suicide bomber has killed nine people along with himself and injured about 50 more in Tel Aviv.
The bomb went off when the street was bustling with people
The bombing, which came during the festival of Passover, was the first suicide attack in Israel since January.
The militant group Islamic Jihad said it was behind the restaurant blast, but Israel said it held the Hamas-led Palestinian Authority responsible.
Hamas, which has been keeping a truce with Israel, described the attack as an act of self-defence.
Palestinian leader Mahmoud Abbas condemned the bombing, saying it ran counter to Palestinian interests.
The US said the blast was "a despicable act of terror for which there is no excuse or justification".
UK Foreign Secretary Jack Straw deplored the "senseless and totally unjustified terrorist attack".
In a statement, the Russian foreign ministry said it condemned the attack firmly and without reserve.
Parliament sworn in
The bombing came shortly before Israel's new parliament was sworn in.
Acting Prime Minister Ehud Olmert said Israel would "act with all means at [its] disposal" to prevent further attacks.
In other violence, a 19-year-old Palestinian has been killed by Israeli artillery shelling in the northern Gaza Strip.
Local people say the youth was playing football near the town of Beit Lahiya when he was hit by shrapnel.
The Israeli military says it was responding to earlier rocket fire from Palestinian militants.
Later, an Israeli helicopter fired a missile into a metal workshop in Gaza City, causing no casualties, Palestinians sources told the Reuters news agency.
It was lunchtime when the bomb went off on a crowded street near a bus station in Tel Aviv's Neve Shaanan's area.
Of the injured, some of whom had to be treated on the pavement, 15 are in a serious condition, Israel TV's Channel 2 said.
Islamic Jihad named the bomber as Sami Salim
A witness, Moussa al Zidat, said the guard at the falafel restaurant had asked the apparent bomber to open his bag: "I saw a young man starting to open his bag. The guard begins opening the bag, and then I heard a boom."
Another witness, 62-year-old Sonya Levy, said she had just finished shopping when the blast went off 50 metres (54 yards) from her car.
"I was about to get into my car, and boom, there was an explosion," she recalled.
"A bit of human flesh landed on my car and I started to scream."
Islamic Jihad issued a videotape in which it named the bomber as Sami Salim, 21, from near the West Bank town of Jenin.
Earlier, a member of another group, al-Aqsa Martyrs' Brigades, told Reuters news agency the attack was to avenge "Israeli massacres" in the Gaza Strip.
Sami Abu Zuhri, the official spokesman for Hamas, said the attack was "a natural result of the continued Israeli crimes" against Palestinians.
"Our people are in a state of self-defence and they have every right to use all means to defend themselves," he added.
Well over a dozen Palestinians have died in recent weeks, nearly all of them militants.
Hamas, which has carried out dozens of previous bombings, has been observing a ceasefire with Israel for more than a year.
The group does nothing to stop other militant groups from attacking Israel, but the tone of the official government statement was, by Hamas standards, quite muted, says the BBC's Alan Johnston in Gaza.
A bomb injured 15 people near the same falafel stall, The Mayor's Falafel, in January.