Two men and one woman have been killed and 40 are injured after a bulldozer rammed into a packed commuter bus in central Jerusalem.

The Palestinian driver targeted the bus, which was overturned in the incident, as well as other vehicles after going amok on Jaffe Street before being shot dead.

Hundreds of people fled the scene while a number of vehicles sustained damage, including a van whose entire front section was crushed.

Television footage showed bystanders pursuing the bulldozer as it ploughed through the early lunchtime traffic.

Men in civilian clothes had climbed onto the bulldozer and one fired a pistol into the cab as others wrestled inside. After the struggle, a police officer in body armour fired his assault rifle at the slumped figure of the driver.

The officer later told reporters that he had fired twice, fearing the wounded man still posed a danger to the public.

Witness Moshe Oren said at the scene: "The only way to stop him was with a bullet to the head. We saw a civilian climb onto the bulldozer and shoot the man. We were relieved."

According to reports, the driver of the bulldozer was a resident of Arab East Jerusalem and worked at building site near the scene.

It was the first Arab attack in Jewish west Jerusalem since a gunman killed eight students in a religious school in March.

The incident followed nearly two weeks into a ceasefire between Israel and the Hamas Islamist group in the Gaza Strip.

Hamas spokesman Sami Abu Zuhri said in Gaza his group did not expect the attack to "influence the Gaza calm".

"There is a continued aggression against our people in the West Bank and Jerusalem and so it is natural that our people there will respond to such aggression," he said.

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