At least 17 people were killed late last night outside a Tel Aviv nightclub when a Palestinian suicide bomber detonated his explosives beside a crowd of Israeli teenagers in the worst such attack in over five years.
At least 75 more young people were injured, many of them seriously.
Israeli officials accused Palestinian Authority President, Mr Yasser Arafat, of responsibility for the blast.
"He is directing the terrorism," said Mr Danny Naveh, a government minister.
While the attack bore all the hallmarks of the Hamas and Islamic Jihad Moslem extremist groups - both of which have threatened in recent days to mount more suicide attacks - it was Mr Arafat, said Mr Naveh, who had "given them the green light". Last night CNN News reported that the Islamic Jihad had claimed responsibility for the bombing.
Mr Oded Eran, a senior Israeli Foreign Ministry official said: "Arafat has assassinated the peace process."
The attack was the latest in a series of blasts and bombings inside Israel in recent days, and by far the most devastating.
"The whole country is a target now," said Tel Aviv's Mayor, Mr Ron Huldai, visiting the chaotic scene of the attack while the wounded were being evacuated and dead bodies still lay on the pavement.
Police later ordered the evacuation of other popular nightclubs for fear of further attacks.
The attack took place a few minutes before midnight, outside the Dolphinarium on the Tel Aviv beachfront - an area that is home to several nightclubs and that was crowded with Israeli young people.
Many of the dead, police said, were young Israelis with Russian names - recent immigrants from the former Soviet Union.
Eyewitness accounts indicated that the bomber, rather than attempting to go into a club, instead walked into a line of Israeli teenagers waiting to gain entrance, and detonated an explosive device.
"I saw bodies flying everywhere," said one eyewitness. "This was a terrible attack," said Israeli police chief, Shlomo Ahronishki. "Lots of times, we've managed to thwart them; not this time, to our sorrow."
Earlier last night, at a crisis meeting called by Prime Minister Ariel Sharon to discuss the escalating attacks inside Israel, and a series of shootings of Jewish settlers on West Bank roads, the government had decided to maintain what it has called its "unilateral ceasefire" policy of the past 10 days - under which it says it has been exercising military restraint.
This policy was already coming under heavy criticism from rightwing members of the coalition. In the wake of last night's blast - the worst since a series of suicide bombings in the spring of 1996 - it seems almost inevitable that Mr Sharon will order a heavy response against Palestinian Authority targets.
"Any government has a basic responsibility to take care of its youngsters, its citizens," said Mr Naveh.