At least 33 people, including a 13-year-old boy, were wounded in the attack near the busy diamond exchange in the Tel Aviv suburb of Ramat Gan.
Police said the fragments of a body found at the center of the blast amid charred metal and shards of glass may have belonged to the suicide bomber.
An anonymous caller to The Associated Press, speaking in Arabic, claimed the attack was carried out by the military wing of the Islamic group Hamas "because of Israel's violation of accords and procrastination in implementing the accords with Palestinians,'' and its "assassinations'' of Palestinians.
The attack came a day before Israel's and the PLO's target date for an agreement on expanding autonomy in the West Bank.
Prime Minister Yitzhak Rabin ordered a suspension of the PLO-Israel talks, which were underway at a Dead Sea resort, and said they would not resume until after the funerals of the victims.
But Rabin said he would not let the attack stop the peace process.
"We don't intend to allow the extremists to achieve their political aims," Rabin said. "We are determined to talk with those who did not carry out attacks and want to stop them."
PLO leader Yasser Arafat called the attack an attempt to undermine the peace process and condemned what he called "terrorist activities'' --the first time he used such language in describing attacks on Israelis.
Palestinian Economics Minister Ahmed Qureia said the talks would resume in a day or two.
Rabin said security on buses would be increased and that he expected "far more effective action'' from both Israel and the Palestinian Authority to stop terrorist attacks.
Israel closed roads leading to the West Bank and the autonomous Gaza Strip, barring Palestinian workers from jobs in Israel.
In Tel Aviv, police gathered Arab workers from construction sites, bus stops and restaurants to prevent reprisal attacks.
Witnesses who arrived shortly after the explosion said mangled bodies and body parts were strewn on the floor of the bus. The bomb tore a hole in the side of the bus and blew out all the windows.
"The bus stopped at the intersection and I heard an explosion,'' said Shlomi Uziel ,23, a university student who was sitting on the rear seat. "People screamed. I didn't know what was happening. I jumped out the window at the back of the bus. I couldn't see anything because there was blood all over my face.''
Uziel, who was slightly injured by flying glass, said wounded passengers were lying on the floor of the bus.
Hundreds of onlookers gathered near the scene and lit candles in memory of the victims. A small group of about 50 people shouted "Death to the Arabs'' and slogans against Rabin.
"This peace is killing us,'' one sign read.
Before Monday's attack, 126 Israelis had been killed in militant attacks since the Israel-PLO accord was signed Sept. 13, 1993.
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