Shortly before 6:00 pm (2030 IST), a car hit pedestrians at the Ammunition Hill tram stop, which lies on the seamline between west and occupied east Jerusalem.
"A private car which arrived from the direction of the French Hill junction hit a number of pedestrians who were on the pavement and injured nine of them," police spokeswoman Luba Samri said in a statement.
"The driver apparently tried to flee on foot and was shot and wounded by a policeman from the Jerusalem district."
"Initial indications suggest this is a hit-and-run terror attack," Samri said.
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A spokesman for the emergency services said one person was in critical condition and another two were seriously hurt in the incident. Another two were in moderate condition and four more sustained light injuries.
At the scene, a silver car with the front badly dented stood in the road and two stationary trains at the nearby tram station, an AFP correspondent said.
Dozens of onlookers watched as police sealed off access to the road, a major traffic artery called Route 1, causing major traffic jams throughout the rest of the city.