A Palestinian gunman has opened fire in a Jewish religious school in Jerusalem, killing at least eight people and wounding about 10 in the most devastating attack in Israel in two years, emergency services have said.

The gunman was killed by an Israeli army officer who lives nearby and ran to the school after hearing gunfire.

As ambulances sped to the area, a Zaka emergency worker said he counted eight bodies at the seminary, which was built 80 years ago.

According to witnesses, the gunmen entered the crowded compound of the seminary, where a religious ceremony was under way, and opened fire.

One witness said: "There was a lot of gunfire and hysteria."

A spokesman for the Israeli Foreign Office said "terrorists are trying to destroy the chances of peace but we will certainly continue peace talks" with Palestinian President Mahmoud Abbas.

There have been no immediate claims of responsibility but in the Gaza Strip, gunmen fired in the air to celebrate the attack.

"This is God's vengeance," blared a loudspeaker in a Gaza City mosque.

And president George W. Bush has been quick to condemn the attack.

He said: "I condemn in the strongest possible terms the terrorist attack in Jerusalem that targeted innocent students at the Mercaz Harav Yeshiva."

He confirmed he had spoken with Israeli Prime Minister Ehud Olmert to offer condolences.

He added: "I told him the United States stands firmly with Israel in the face of this terrible attack."

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