A dual bomb attack killed at least five people and injured more than 40 near a cafe in Tel Aviv Wednesday night, police said.
An eyewitness to the attack said that two homicide bombers exploded a few seconds apart.
The homicide attack further delayed high-level contacts between the Palestinians and Israelis.
The explosions came on a day when Israel bombed what it said was a Hamas weapons factory, and when its troops swept through Palestinian areas, making several arrests.
The attack took place between a cafe and a theater in a rundown neighborhood where many foreign workers live. Police said two of the dead were foreign laborers and many of the wounded were from Romania.
Past Palestinian bombing attacks have targeted Israeli civilians. Most of the city Wednesday night was shut down for Tisha B'Av, a holiday marking the destruction of the ancient Jewish Temples. This was one of the few areas crowded with people.
The group Islamic Jihad claimed responsibility for the bombings, according to the Al Manar TV station in Lebanon. Israel blamed the Palestinian Authority, but that group condemned the attack.
The homicide bombers were standing only 15 to 20 yards from each other when they set off the explosions on Neve Shaanan street in the southern part of the downtown area where foreign workers gather to socialize. The area is crowded with small shops and stalls.
They said three civilians and the two bombers died and more than 40 people were wounded. Police earlier said the death toll was higher.
Dutu Raduian, a worker from Romania, said he heard an explosion, and the lights in his nearby apartment went out.
"Moments later we heard the second explosion. I went down" to the street, he said. "It was horrible, dead people were everywhere and the injured were screaming. I've never seen such a thing in my life." Shaken, he said he would take his family back to Romania.
About 300,000 foreigners work in Israel. With Israel's economy in a slump, employers welcome the cheap migrant workers, most of whom are in the country illegally and are willing to work long hours for less than minimum wage.
In a statement, the Palestinian Authority denounced the bombing attack as it "condemns operations targeting civilians, whether they are Palestinians or Israelis." The statement said such attacks are "dangerous to the Palestinian national interest" but charged that Israel was responsible for "creating by this the suitable atmosphere for such operations which we condemn and reject."
As a result of the bombing, Israeli Defense Minister Binyamin Ben-Eliezer ordered a freeze on measures to ease conditions for Palestinians, a statement from his office said. Israeli troops moved into seven of the eight main West Bank cities and towns and imposed curfews after two homicide bombings in Jerusalem.
White House spokesman Scott McClellan said of the attack: "This is a despicable act of terrorism which we strongly condemn."
U.N. Secretary-General Kofi Annan urged both sides not to let the violence derail peace efforts.
Already Israel had called off a high-level meeting with Palestinian officials, set for Wednesday, because of a Palestinian attack on a bus in the West Bank Tuesday that killed eight Israelis, including two babies — the first deadly assault on Israeli civilians in nearly a month.
Israeli leaders on Wednesday discussed setting a new date, but an official later said the talks could not resume while Israel is burying its dead from terror attacks.
The last homicide attack came on June 11 when a bomber killed an Israeli teenager in the Tel Aviv suburb of Herzliya.
In more than 21 months of fighting, 1,761 people had been killed on the Palestinian side and 577 on the Israeli side.
Earlier Wednesday evening, an Israeli warplane bombed a metal workshop in the Gaza Strip. The Israelis said the factory was used to manufacture weapons for the violent Islamic Hamas.
And in the West Bank, Israeli forces swept through Palestinian areas, arresting a senior Hamas militant and killing three Palestinians.
In the Amari refugee camp next to Ramallah in the West Bank, two Palestinian boys, ages 6 and 14, were killed in an explosion. Palestinian security officials said they picked up an explosive and it went off.
Near Qalqiliya, Israeli soldiers spotted two Palestinians trying to infiltrate into Israel. They shot and killed one of the Palestinians and started searching for the other, Israeli military sources said, speaking on condition of anonymity.
The renewed violence came as Palestinian leader Yasser Arafat was considering appointing a prime minister to take over daily affairs, the Palestinians said, a way of responding to Israeli and U.S. demands that Arafat be replaced.
Israel and the United States have declared a personal boycott against Arafat, charging that his regime is tainted with terrorism and corruption. Israel has suggested that Arafat remain as a ceremonial president while turning power over to others. U.S. officials also gave positive indications about the idea of Arafat's appointing a prime minister.
In a manhunt for Palestinians who ambushed a bus near the Jewish settlement of Emmanuel a day before and killed eight people, including two babies, Israeli soldiers killed a Palestinian gunman in an exchange of fire in which an Israeli army officer was killed and three soldiers wounded. After nightfall Wednesday, the search was still in progress.
In Ramallah, Israeli forces arrested the overall commander of the Hamas military wing, Mohammed Natsheh, Israeli media reported. Palestinian security and the Israeli military refused to comment.
Israeli forces in armored vehicles entered the West Bank village of Silat Dahir, near the town of Jenin, exchanging fire with militants and making arrests. Palestinians said two men were killed.
Meanwhile, Israelis buried five of the eight people killed in the Tuesday ambush outside the Jewish settlement of Emmanuel, between the Palestinian towns of Nablus and Qalqiliya. Palestinians set off a powerful bomb, stopping an armored bus, and then opened fire on the passengers and threw grenades. Among the dead were an 8-month-old baby, her father and grandmother.
Doctors desperately tried to save Yehudit Weinberg's baby, but failed. Eight months pregnant, she was shot seven times in the abdomen and legs. Doctors delivered her baby by emergency Caesarean section, but he had no pulse because of his mother's loss of blood, doctors said, and he died a few hours later.
The Associated Press contributed to this report.