A Palestinian gunman wounded four Israelis before being shot dead in the southwestern Jerusalem district of Talpiot today, police said.
The man opened fire with a pistol in the west Jerusalem district, injuring four people - two of them seriously.
A passing Israeli soldier then shot the man, police said. Witnesses said an Israeli civilian had also opened fire on the gunman.
Ambulances rushed to the scene, evacuating the injured to hospital, while police combed the area for possible accomplices.
The Israeli foreign minister has expressed faith in Mr Yasser Arafat but said his failure to arrest those deemed responsible for the killing of an Israeli minister had almost destroyed the peace camp in Israel
"Arafat has to reestablish his credibility in the eyes of Israelis and in the eyes of the United States," Mr Shimon Peres told an American-Jewish convention.
"Arafat wants to belong to the 'club' that fights terror . . . but you cannot enter the non-smoking room with a cigar in your mouth," he said.
Mr Peres urged President Arafat to replace words with deeds. He said Arafat and the Palestinian Authority must hand over those involved in the assassination of Israeli Tourism Minister Rehavam Zeevi and arrest militants on Israel's most-wanted list.
Mr Peres said Israel was not trying to oust President Arafat or his Palestinian Authority and had no intention of staying in Palestinian-controlled areas.
AFP