A Palestinian gunman opened fire at the entrance to the West Bank settlement of Har Adar, killing three Israelis and injuring another before being shot dead.
The break in the recent lull in violence comes on a day when US President Donald Trump's Middle East envoy, Jason Greenblatt, arrived in Jerusalem to try to revive the deadlocked Israel-Palestinian peace talks.
Greenblatt's visit comes just days after US President met Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas in New York and reiterated Washington's commitment to work towards a comprehensive peace agreement.
The Palestinian gunman, identified in Israeli media as Nimer Jamal, a 37-year-old from a nearby village, was shot by Israeli security and died later.
Netanyahu blamed the attack on Palestinian incitement and demanded that Abbas condemn the attack unequivocally.
"This is a difficult morning with three Israelis murdered by a miscreant. On behalf of the government and the entire people of Israel, my condolences go out to the families of the deceased, and I also wish a speedy recovery to the settlement's military security coordinator who was also injured. The attack and its ramifications are still under investigation," the Israeli Prime Minister said.
"What we can say now, however, is that the terrorist's home will be demolished, the IDF (Israel Defence Forces) has already encircled his village and the work permits of his extended family will be revoked," he said in line with Israel's policy to deter Palestinians from carrying out such attacks.
"This murderous attack is a result of methodical incitement by the Palestinian Authority and other entities, and I expect Mahmoud Abbas to denounce the attacking rather than attempt to justify it. Security forces will continue working against the incitement and terrorism as they do every day, and we will conclude the inquiry into the specifics of this attack," Netanyahu asserted.
The White House has tried to lay the groundwork for a resumption of negotiations since Donald Trump took office in January, but there has been no sign of progress.
Peace talks between the two sides broke down in April 2014 and all attempts to revive it since then have been futile with a wave of stabbing, shooting and car ramming attacks further fueling tensions between the two sides.
Israeli Police said that the Palestinian gunman struck after he raised suspicions of security personnel at a rear gate at Har Adar settlement.
He shot his victims, two security guards and a border policeman, at close range, and seriously injured another person, before being shot by Israeli security forces.
Jamal had an Israeli permit to work in Jewish settlements along the boundary of the West Bank. He came from the near by village of Beit Surik, about a mile east of Har Adar.
No group has taken responsibility for the attack, although Gaza based Palestinian militant organisations Hamas and Islamic Jihad welcomed the attack.
"The Jerusalem attack is a new chapter in the Al-Quds intifada. It underlines the fact any attempts to Judaize (the city) have failed on the ground. Jerusalem is Arab-Muslim. Its residents and youth will spare no effort to redeem it with their spirit and blood," Ynetnews quoted Hamas as saying after the attack.
Some 50 Israelis, five foreign nationals and around 300 Palestinians are said to have been killed in stabbing, shooting and car ramming attacks since late 2015.
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