At least nine people have been killed and more than 40 others injured in suspected suicide bombing on a bus in northern Israel.

The blast, which ripped off the roof and sides of the vehicle, happened during rush hour, as the bus was coming into the town of Safad from the port of Haifa.

The Israeli Government immediately cancelled all planned meetings with Palestinian officials and promised a "fight without mercy" against militants.

About three hours later, a Palestinian gunman opened fire on an Israeli lorry near the Damascus Gate in Jerusalem's Old City.

Police say one Israeli was killed. The gunman and an Arab bystander also died in the ensuing shootout.

For those who yearn for peace in the Middle East...we must do everything we possibly can to stop the terror

President Bush

Israeli Prime Minister Ariel Sharon, who was in a weekly cabinet meeting when he heard of the bus explosion, said Israel would "continue to act against terrorism in any way that we find it".

Police say they believe a suicide bomber was responsible, although it is not clear if the 10 dead were all passengers or included the attacker.

Military passengers

Many of the passengers were soldiers returning to their bases after the weekend.

The militant group Hamas has said it carried out the attack.

A statement received in Lebanon by the Hezbollah television station Al-Manar, said this was the second act of retaliation for the death of a Hamas leader - along with 14 other people - in an Israeli bombing in Gaza last month.

Hamas also claimed responsibility for the bombing of Jerusalem's Hebrew University last Wednesday that killed seven people, five of them Americans.

The Palestinian leadership condemned the bus attack as a "terrorist operation".

"We condemn this like any operation committed inside Israel," said a statement from the Palestinian cabinet.

However, the statement said Mr Sharon had undermined security efforts in the West Bank by arresting thousands of Palestinian police officers.

US President George W Bush said he was "distressed" to hear about the latest bomb attack.

"For those who yearn for peace in the Middle East - for those in the Arab lands, for those in Europe, for those all around the world... we must do everything we possibly can to stop the terror," he said.

Scene of carnage

Eyewitnesses at the scene of the attack described terrible scenes.

"I picked up four dead myself," Haim Ben-Shimon told Army Radio.

Several people were wounded in the Jerusalem shooting

"The bus is simply crushed. It looks as if the explosion happened in the centre of the bus."

Pinhas Cohen said: "A soldier came out with his face and uniform covered with blood, and two Arabs from the nearby restaurant gave him first aid."

Ten of the wounded suffered serious injuries.

Avir Zohar, a spokesman for the Israeli Ambulance Service, said local hospitals were struggling to cope. He said some of the more seriously wounded had been taken to other hospitals in Israel.

The Israeli Communications Minister, Reuven Rivlin, blamed Palestinian leader Yasser Arafat for the continuing violence.

"As long as Arafat is going to be the leader of the Palestinian people, there is no solution, there is no way to come to any kind of conciliation," he said.

Palestinian response

In the Jerusalem shooting, a Palestinian armed with a pistol opened fire on a truck belonging to Israel's main phone company, Bezeq.

A security guard was killed and the driver was injured, police said.

A gun battle with police then broke out and an Arab bystander was killed by crossfire before the gunman was shot dead.

There was no immediate claim for the shooting.

Gaza killing

An armed Palestinian was shot dead on Sunday as he tried to break into a Jewish settlement on the coast of the Gaza Strip, the army said.

The man, who was wearing a wetsuit, was reported to have been seen emerging from the sea armed with grenades and a rifle.

The violence comes as Israel continues a controversial policy of trying to deter would-be bombers by punishing their families.

The Israeli army is reported to have demolished several homes of suicide bombers overnight in the West Bank town of Nablus.