The future of truce talks between Israel and the Palestinian Authority was thrown into doubt Thursday when a suicide bomber blew himself up in the heart of Jerusalem, killing three bystanders and wounding at least 60 others.

The attacker, identified as 22-year-old former policeman Mohammed Hashaika, had been jailed in the West Bank city of Ramallah for trying to carry out an earlier attack, but he was released by the Palestinians last week when Israeli troops entered the city.

Israel immediately canceled a third round of U.S.-sponsored cease-fire talks that were scheduled in the evening.

Officials on both sides said an agreement had been close. It was not known to what extent the talks schedule had been disrupted. Both of U.S. envoy Anthony Zinni's previous truce missions were scuttled by surges of violence.

Moments after the late afternoon blast, the dead and injured lay on a blood-splattered pavement on King George Street, amid glass shards and twisted awnings from a hat boutique, a shoe store and a candy shop. A policeman screamed for help. Passers-by knelt over a wounded young boy. More than 60 people were injured.

The Al Aqsa Brigades, a militia linked to Palestinian leader Yasser Arafat's Fatah faction, claimed responsibility for the bombing, which came a day after an Islamic militant set off explosions on a crowded bus in northern Israel, killing himself and seven others.

In Washington, the Bush administration said it is taking steps to declare the Al Aqsa group a terror organization. Secretary of State Colin Powell called Arafat and demanded that he denounce the bombing, spokesman Philip Reeker said. Later, Powell called Israeli Prime Minister Ariel Sharon, the state department said. Sharon's office said Powell expressed condolences.

In a rare step, Arafat personally condemned the bombing and promised to take immediate steps to prevent such attacks.

But President Bush said he was "disappointed" by Arafat's response. "We've set some strong conditions," Bush said. "We expect Mr. Arafat to meet those conditions."

Zinni met with Sharon and senior Israeli Cabinet ministers late Thursday in an apparent effort to rescue his mission.

Secret position papers obtained Thursday by The Associated Press show the two sides disagree over the order of implementing a cease-fire plan worked out last year by CIA chief George Tenet and endorsed by both sides.

The Palestinians want Israel to start by lifting roadblocks and restrictions in the West Bank and Gaza Strip and complete the process within two weeks. The Palestinians propose negotiations "for ending the Israeli occupation of Palestinian territories."

The Israelis demand that the Palestinians arrest terrorists and dismantle the infrastructure of militant groups, making handover of territory "conditional on the security situation." Israel seeks a four-week period of implementation.

Israel held Arafat directly responsible for the suicide attack. In a veiled warning that retaliation might be forthcoming, a statement from Sharon's office said, "Israel cannot continue for long a unilateral effort" to enforce a cease-fire. The statement said that Arafat "is solely responsible for the murderous terrorism."

On Wednesday in an effort not to disrupt Zinni's mission, Israel refrained from military action after the bombing on a commuter bus that killed the assailant and seven passengers.

"We must act," Israeli Interior Minister Eli Ishai said Thursday. "We are in a war, and the Americans must understand that."

Israeli security sources said Hashaika was among dozens of suspected militants Israel had asked the Palestinian Authority to arrest.

An Al Aqsa spokesman, who used a nom de guerre, Abu Mujahed, said the militia would not stop attacks until there is a truce agreement. The spokesman said Arafat has not given orders to stop attacks on Israelis.

A weary-looking Arafat summoned journalists to his Ramallah headquarters Thursday evening, and read a prepared statement in Arabic. "We strongly condemn this military operation ... especially since it was against innocent Israeli civilians," Arafat said, adding that he would take immediate efforts "to put an end to such attacks." It was not clear if he made the statement after speaking with Powell.

Wednesday's bus bombing was carried out by the militant Islamic Jihad group, which has said it would not honor a cease-fire under any circumstances.

Thursday's explosion went off at about 4:25 p.m. at the foot of Jerusalem's tallest office tower and near cafes, shops and a falafel stand.

The bomber had raised suspicions of pedestrians, a witness, Adi Aluz, told Israel's Channel 1 TV. He said the suspect wore a denim coat with a hood and kept smiling and looking backward.

"I started following him," Aluz said. "I told two cops about him, what he was wearing. They started following him. By the time they got to him he was already at King George Street. By that time, he blew up."

Shocked bystanders hugged each other, some crying or holding their hands to their faces as ambulances, sirens wailing, evacuated the wounded. Several men rocked back and forth in prayer.

The back-to-back bombings dealt a blow to U.S. efforts to reach a cease-fire ahead of next week's Arab summit in Beirut, where Saudi Arabia was to present a groundbreaking offer to Israel for comprehensive peace with the Arab world in exchange for a withdrawal from occupied territories.

Saudi officials have said they would only present the plan if Arafat attended. Arafat has been confined to Ramallah for the past three months, and Sharon said this week he would only lift the travel ban if a truce took hold.

The Palestinians also want a meeting between Arafat and Vice President Dick Cheney, who met Sharon but not Arafat during a visit this week to Israel. The vice president said Thursday that he was willing to meet the Palestinian leader once he agrees to a cease-fire.

So far, Israel and the Palestinians have held two rounds of truce talks in Zinni's presence.

The Associated Press contributed to this report.