The attack came as U.S. Secretary of State Hillary Rodham Clinton shuttled between Jerusalem, the West Bank and Egypt to help piece together a deal to end Israel's weeklong offensive against Palestinian militants in the Gaza Strip that has killed more than 130 Palestinians. Militant rocket fire into Israel has killed five Israelis.
Hours after the blast, Clinton arrived in Cairo and entered talks with Egyptian President Mohammed Morsi, who has been taking the lead in mediating between Israel and Hamas.
The blast, which left the bus charred and its windows blown out, was the first bombing in Tel Aviv since 2006. It appeared aimed at sparking Israeli fears of a return to the violence of the Palestinian uprising last decade, which killed more than 1,000 Israelis in bombings and shooting attacks and left more than 5,000 Palestinians dead as well.
Israeli Deputy Prime Minister Silvan Shalom, who heard the explosion from his Tel Aviv office, called it "an escalation."
"What does it say about the future of the (truce) talks? I leave it to (the senior officials), but this doesn't add anything," Yitzhak Aharonovich, Israel's minister of internal security, told Army Radio.
While Hamas did not take responsibility for the attack, it praised the bombing.
"We consider it a natural response to the occupation crimes and the ongoing massacres against civilians in the Gaza Strip," Hamas spokesman Fawzi Barhoum told The Associated Press.
The bombing came after a night of more than 30 Israeli airstrikes over Gaza that hit government ministries, smuggling tunnels, a banker's empty villa and a Hamas-linked media office.
Medics said a child was killed in one airstrike, raising the Palestinian death toll to at least 140, dozens of them civilians. More than 1,100 were wounded. Five Israelis have also been killed by Palestinian rocket fire, which continued early Wednesday with dozens of rockets.
Thousands of Israeli ground troops were massed on the Gaza border, awaiting a possible order to invade.
The Tel Aviv bus attack took place around noon on one of the coastal city's busiest arteries, near the Tel Aviv museum, the district courthouse and across from an entrance to Israel's national defense headquarters.
The blast was from a device placed inside the bus by a man who then got off, Aharanovich said. The explosion took place while the bus was moving, he said.
Blood splattered the sidewalk at the site of the explosion, with glass scattered around.
"We suddenly heard a huge explosion and immediately knew it was a terror attack," said Nir Zano, 35. "I saw someone running in to carry out a woman who was injured."
Police set up roadblocks across the city trying to apprehend the attacker.
"We strongly believe that this was a terror attack," said police spokesman Micky Rosenfeld. He said three of the 10 wounded were moderately to seriously hurt.
In Gaza, the bombing was praised from mosque loudspeakers, while Hamas' television station interviewed people praising the attack as a return of militants' trademark tactics.
British Foreign Secretary William Hague said he was "deeply concerned" by the bombing.
"This shocking violence further underlines the urgent need for an immediate de-escalation of violence and a full ceasefire," Hague said in a statement.
Clinton said the U.S. "strongly condemns" the bombing, which she called a "terrorist attack."
Israel and Hamas had seemed on the brink of a truce deal Tuesday following a swirl of diplomatic activity also involving U.N. chief Ban Ki-moon and Egypt's Morsi. But sticking points could not be resolved as talks - and violence - stretched into the night.
Clinton shuttled among the sides, meeting Israeli Prime Minister Benjamin Netanyahu in Jerusalem Tuesday night, then Palestinian President Mahmoud Abbas in the West Bank the next morning before heading to Cairo.
In overnight Gaza violence, at least four airstrikes within seconds of each other pulverized a complex of government ministries the size of a city block, rattling nearby buildings and shattering surrounding windows. Hours later, clouds of acrid dust still hung over the area and smoke still rose from the rubble.
The impact of the blast demolished the nearby office of attorney Salem Dahdouh, who was searching through files buried in the debris.
"Where are human rights?" he asked, saying officials negotiating a cease-fire ought to see the devastation.
In downtown Gaza City, another strike leveled the empty, two-story home of a well-known banker and buried a police car parked nearby in rubble.
"This is an injustice carried out by the Israelis," said the house's caretaker, Mohammed Samara. "There were no resistance fighters here. We want to live in peace. Our children want to live in peace. We want to live like people in the rest of the world."
The Israeli military said its targets included the Ministry of Internal Security, which it says served as one of Hamas' main command and control centers, a military hideout used as a senior operatives' meeting place and a communications center.
Washington blames Hamas rocket fire for the outbreak of violence and has backed Israel's right to defend itself, but has cautioned that an Israeli ground invasion could send casualties soaring.
"In the days ahead, the United States will work with our partners here in Israel and across the region toward an outcome that bolsters security for the people of Israel, improves conditions for the people of Gaza and moves toward a comprehensive peace for all people of the region," Clinton said Tuesday night in Jerusalem, speaking alongside Netanyahu.
While Abbas does not have any practical influence in Gaza, his West Bank government would be instrumental in implementing any new arrangements on the Gaza border that would be part of a cease-fire pact. Israel and Egypt slammed shut the border after the militant group seized the territory from Abbas in June 2007, hoping to disrupt Hamas rule. Both sides have since eased the restrictions, but many remain.
The U.S. considers Hamas, which has killed hundreds of Israelis in suicide and other attacks, to be a terror group and does not meet with its officials.
Hamas official Izzat Risheq predicted a truce deal would be reached Wednesday, but the movement wouldn't discuss what the problems were.
Israeli media quoted Defense Minister Ehud Barak as telling a closed meeting that Israel wanted a 24-hour test period of no rocket fire to see if Hamas could enforce a truce among its forces and other Gaza militant groups.
Palestinian officials briefed on the negotiations said Hamas wanted assurances of a comprehensive deal that included new arrangements for prying open Gaza's heavily restricted borders - and were resisting Israeli proposals for a phased agreement. The officials spoke on condition of anonymity because they were not authorized to talk to the media.
Israel's outspoken foreign minister, meanwhile, expressed what many in Israel suspect - that ahead of January elections, the country's leaders do not want to get mired in a ground operation.
"There is no point embarking on such a dramatic move two months before elections after we didn't do it for four years," Foreign Minister Avigdor Lieberman told the Ynet web site Tuesday. Israeli government spokesman Mark Regev had no comment on Lieberman's remarks.
Israel launched the offensive on Nov. 14 following months of rocket salvoes from the territory into southern Israel, which has endured attacks for the past 13 years. It battered the territory with more than 1,500 airstrikes. The militants hit back with more than 1,400 rocket attacks.
(Copyright 2012 by The Associated Press. All Rights Reserved.)