Tel Aviv police say the blast was caused by a car bomb, and they say the attacker is apparently among the at least four people killed. Some 30 other people were injured. Witnesses say bodies were strewn around a wide area.
The Palestinian militant organization the Popular Front for the Liberation of Palestine (PFLP) claimed responsibility for the bombing, saying it was carried out by a teenager from Nablus. It is the first major attack since the end of August, when Palestinian militants blew up two buses in the southern city of Beersheba, killing 16.
The timing of the blast could have more significance than the act itself.
London-based Mideast expert Turi Munthe says the attack could represent a statement by the militants that the struggle will continue even without veteran Palestinian Authority President Yasser Arafat.
"This attack reminds [the Israelis] that in fact that they are going to be in an extremely tricky position should Arafat be incapable of being the single possible signatory for any kind of negotiations or peace with Israel," Munthe said.
Munthe said in that case the bombing could have been meant to dampen Israeli officials' relief that they would no longer have to deal with Arafat, whom they view as a terrorist.
Munthe, who heads the Middle East analysis program at the Royal United Services Institute, also said the bombing may be a signal of an impending power struggle within the divided Palestinian movement.
"There is an enormous amount of jockeying for power inside Palestine, like there is a jockeying for power among the various different factions of what is called Al-Qaeda, and they are trying to put their name 'on the map,'" Munthe said. "And if it is the PFLP [behind today's bombing], then this is an organization which we have not heard much from recently."
Arafat left his headquarters compound in Ramallah on the West Bank four days ago for the first time in years. He was flown to a hospital in France for urgent medical treatment.
Arafat had been refusing to leave the compound, wrecked in Israeli attacks, in case the Israelis did not let him return to the Palestinian territories. But the Israeli government let it be known that it would allow him to return.
Arafat's illness has not yet been diagnosed. His aides say his condition has stabilized and his illness is curable.
Israeli officials have said the Israeli army will act with restraint while Arafat is away, so as not to add fuel to the possibility of a power struggle to replace the 75-year-old leader. Palestinian Authority officials have sought to convey stability. Palestinian Prime Minister Ahmed Qurei spoke with journalists in Ramallah.
"We will discuss many things, the [Arafat] situation, the continuation [of leadership], the regular meeting of the institutions, and to continue everything until President Arafat will come back," Qurei said.
But even if Arafat never returns, today's bombing is a reminder that the Israeli-Palestinian conflict is far from resolved.