A resident of Israeli-annexed east Jerusalem wounded on Monday five pedestrians in the city centre before being shot dead, in what Prime Minister Benjamin Netanyahu called a "terrorist attack".
The Magen David Adom emergency service said those hurt included a 70-year-old man who was left in a "serious condition", as well as a 30-year-old woman.
Police said the driver, a man in his 30s, was a resident of Beit Safafa, a Palestinian neighbourhood in east Jerusalem.
"A citizen who witnessed the incident and was near the scene shot and neutralised the terrorist," police said in a statement, adding the driver was "pronounced dead at the scene".
The incident took place near the usually bustling Mahane Yehuda market in west Jerusalem.
Medics subsequently loaded a body bag into an ambulance, according to two AFP journalists.
They also saw a badly damaged car and dozens of police officers within a cordon, while scores of onlookers surveyed the scene.
Speaking after the incident, Netanyahu said: "A few minutes ago, not far from here, there was another attempt to murder Israeli citizens."
The prime minister described the event as a "terrorist attack", as Israel prepared to mark the 75th anniversary of its founding this week.
It came just hours after Israeli forces killed a Palestinian man during a raid near Jericho in the occupied West Bank, during what the army described as a "counterterrorism" operation.
Israel has occupied the West Bank since the 1967 Six-Day War, when it also seized east Jerusalem.
Prior to the Jerusalem incident, the conflict had this year claimed the lives of at least 97 Palestinians, 19 Israelis, one Ukrainian and one Italian, according to an AFP count based on Israeli and Palestinian official sources.
These figures include, on the Palestinian side, combatants and civilians, including minors, and on the Israeli side, mostly civilians, including minors, and three members of the Arab minority.