Violence has been on the rise, with the knife slaying this month of a Jewish settler family as they slept and the deaths of civilians in Gaza by Israeli strikes Tuesday in retaliation for rocket fire from the Hamas-ruled strip.
Israeli Prime Minister Benjamin Netanyahu warned militants not to test Israel's "iron will," and vowed a tough response to the bombing.
"Since this government was formed we had a clear security policy -- an immediate and aggressive response to every attempt to harm Israeli citizens," he said after spending the evening huddled with his defense minister, military chief and other top security officials.
"We will act aggressively, responsibly and wisely in order to preserve the quiet and security that endured here the past two years."
The bombing -- the first fatal attack in Jerusalem in several years -- along with a rocket barrage Wednesday on the southern city of Beersheba, come at a delicate diplomatic moment and could have far-reaching consequences, especially if Israel retaliates or more attacks follow.
In December 2008, Israel responded to months of intense rocket fire with a fierce offensive in Gaza, killing some 1,400 Palestinians, including hundreds of civilians. Hamas, which suffered heavy losses, has largely honored an unofficial truce since then, but in recent weeks the lull has begun to fray.
The virulently anti-Israel Hamas had no comment on Wednesday's attack and there was no immediate claim of responsibility. Hamas' Palestinian rival, the moderate Palestinian Authority, quickly condemned the bombing "in the strongest terms."
The blast went off just as rush hour was starting, around 3 p.m., at a crowded bus stop next to the main convention center, and blew out the windows of two crowded buses. Police said a 4-pound (2-kilogram) bomb went off in a small bag placed at the site.
Rescuers removed bloodied people from the area on stretchers, as sirens from speeding ambulances wailed in the background.
The bomb blew up next to a food stand called "a blast of a kiosk," a name the owner said was to remember an earlier attack at the same site in 1993.
A kiosk worker, David Amoyal, emerged as a hero after police released a recording of him calling authorities to warn them of flames erupting from a nearby phone booth. "Listen there is a bag near the bus stop here," he is heard saying just before the explosion. Amoyal was among the wounded.
The bombing was relatively minor by the standards of the Palestinian uprising of several years ago -- when suicide bombers would routinely explode aboard crowded buses and in cafes, restaurants and clubs, killing dozens of people or more in the worst attacks.
But even the specter of a renewal of such attacks -- which deeply scarred the Israeli psyche and left the country's peace movement in tatters -- was enough to bring calls for retaliation.
Arriving on the scene soon after the blast, Eli Yishai, Israel's hard-line interior minister, urged revenge. "With these murderers, these terror organizations...we must act, or we will lose our deterrence," he said.
Nearby, young Ultra-Orthodox Jewish men vented their anger, chanting "death to Arabs."
"It's a very sad day, said one of them, Meny Friedman. "Finally we have the ability to get out what we have to say about Palestinians."
Israeli authorities said a 60-year-old woman was killed and about two dozen other people were wounded, several critically.
The road was blocked off, creating a huge traffic jam on the highway from Tel Aviv at the entrance to the city. Police, accompanied by sniffer dogs, broke into cars near the site to search for evidence and possible additional explosives. None were found.
Jerusalem's police chief, Aharon Franco, said there were no firm leads but authorities were investigating a possible link to a small bombing earlier this month that wounded a garbage collector as he removed the device from a trash can.
With peace talks stalled since September, tensions between Israelis and Palestinians have been on the rise. The Palestinian Authority appears set for a unilateral diplomatic push to get the world community to recognize a Palestinian state by fall, with or without a peace deal.
Netanyahu, increasingly isolated internationally, has been under pressure to produce a peace offer that might break the deadlock. But a renewal of violence could change that.
Israel's Defense Minister Ehud Barak issued a stern warning Wednesday, saying he held Hamas responsible for the rockets that exploded in the southern city of Beersheba. One man was wounded by shrapnel.
"We will not tolerate the harming of Israeli citizens, not in the south and not in Jerusalem," he said. "Hamas is responsible for the firing of rockets toward Beersheba today and this responsibility has a price."
Israel's U.N. ambassador, Meron Reuben, send a letter of complaint over the bombing and rocket salvos to the secretary-general and Security Council. He called on the "international community to condemn all of these attacks in very clear terms and send a firm message to these terrorists and their patrons."
The bombing in Jerusalem brought back memories of the second Palestinian uprising last decade. More than 6,000 people were killed on the Palestinian side and more than 1,000 on the Israeli side in the violence. The last suicide bombing in Jerusalem was in 2004, and the last suicide bombing in Israel occurred in 2008 in the southern town of Dimona. Even so, Jerusalem has experienced other deadly violence. In early 2008, eight students at a Jerusalem seminary were killed when Palestinian gunmen entered the school and opened fire.
Jerusalem Mayor Nir Barkat said the city would rebound quickly, vowing that Jerusalem's first-ever marathon would take place as planned on Friday.
"Every once in a while we are reminded who we are dealing with, a bunch of cowardly terrorists that put bombs in the middle of pedestrians," he said. "They will very soon find out that the city goes back to normal life and this is the best way to deal with terror -- to show them that they have no gain from hurting innocent people."