Israeli PM Benjamin Netanyahu says all the signs are that the driver in the deadly attack was a supporter of Islamic State.
A lorry rammed into a group of Israeli soldiers as they got off a bus in Jerusalem, killing at least four people and injuring many more.
A police spokeswoman said the incident was being treated as a "possible terrorist attack" after the truck veered off course and struck the soldiers who had just disembarked from a bus.
The Israeli prime minister Benjamin Netanyahu said all the signs suggest that the driver was a supporters of Islamic State.
She said the attacker, a Palestinian man, had been neutralised.
An Israeli bus driver who witnessed the incident said the truck ploughed into the soldiers and they fired on the driver who reversed direction and ran over them again.
He said: "They shot him, until they neutralised him."
He said the driver was killed and footage showed bullet holes in the truck's windscreen.
Israeli television stations said at least four people were killed and that about 15 wounded bodies were strewn on the street at the Armon Hanatziv promenade overlooking the walled Old City of Jerusalem.
Police said the four people killed were in their 20s and included three women and a man. Of those injured, one is in a serious condition.
Since last year, Palestinian attackers have killed 36 Israelis and two visiting Americans in a series of mostly stabbing attacks.
During that time, 229 Palestinians have been killed by Israeli fire. Israel says most of the Palestinians killed were attackers while the rest died in clashes.
Israel says the violence is driven by Palestinian incitement while Palestinians say it's the result of nearly 50 years of Israeli occupation.
The Palestinian Hamas movement, an Islamic militant group that rules Gaza and has killed hundreds of Israelis in attacks over the years, praised the assault but stopped short of taking responsibility.
Hamas spokesman Abdul-Latif Qanou called it a "heroic" act and encouraged other Palestinians to do the same and "escalate the resistance".
He said the attack proves the wave of Palestinian violence has not ended, despite a recent lull.
He said: "It may be quiet, it may linger, but it will never end."
Jerusalem Mayor Nir Barkat called on residents to be wary but carry on with their everyday life.
He said: "Unfortunately, there is no limit to the cruelty of terrorists who spare no means in killing Jews and disrupting their way of life.
"Those who incite and support terror must pay a heavy price."