At least nine people were killed by Palestinian bomber during his attack on a crowded restaurant in Tel Aviv, Israeli police say.

Another 50 people were injured in the blast, which occurred at The Mayor's Felafel restaurant, close to the central bus station in the crowded Neve Shaanan area on Monday afternoon.

Ehud Olmert, the acting Israeli prime minister, said Israel "would react in a necessary way" to the bombing.

Responsibility for the attack has been claimed by the Palestinian organisation, Islamic Jihad.

The group identified the bomber as Sami Salim Mohammed Hammed.

In a video released by the group and broadcast by the Arabic TV channel, al-Arabiya, Hammed said the bombing was dedicated to the thousands of Palestinian prisoners in Israeli jails, adding: "There are many other bombers on the way."

The bombing was the first attack in Israel by Palestinian groups since January and came hours before the swearing-in of the new Israeli parliament.

Palestinian groups had vowed to take revenge after recent Israeli military strikes in northern Gaza that left 18 Palestinians dead.

It is the first bomb attack since Hamas formed a new government in the Palestinian territories more than two weeks ago.

A witness, Moussa al-Zidat, said a security guard outside the restaurant asked the suspected 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."

The Palestinian president, Mahmoud Abbas, condemned the attack in a statement issued by his office.

"This attack violates the Palestinian national consensus and runs contrary to our interests," the statement said.

Khaled Abu Helal, a spokesman for the newly elected Hamas government, said the attack was "a direct result of the policy of the occupation and the brutal aggression and siege committed against our people".

However, Gideon Meir, an Israeli foreign ministry spokesman, said Israel held Hamas ultimately responsible for such attacks.

"From our point of view, it doesn't matter if it comes from al-Aqsa, Islamic Jihad or Hamas. They all come out of the same school of terrorism led by Hamas," he said.

Meanwhile one Palestinian was killed and two wounded by an Israeli artillery shell in the northern Gaza Strip town of Bait Lahiya according to medics.

PHOTO CAPTION

Israeli rescue workers evacuate a victim's body from the scene in Tel Aviv. (AFP)