Tension high after first bomb explosion in six years in the holy city leaves one dead and dozens injured

Israel's prime minister, Binyamin Netanyahu, has vowed to react "aggressively" after a suitcase bomb exploded in Jerusalem, killing a 60-year-old woman and injuring dozens of others.

The bombing, the first in the city for almost seven years, follows several days of rising tension along the Gaza border. The violence poses a serious threat to the prospects of reactivating peace talks between Israel and the Palestinians.

Three people were seriously hurt and about three dozen suffered minor to moderate injuries in the attack.

"Israel will act aggressively, responsibly and wisely to preserve the quiet and security that prevailed here over the past two years," Netanyahu said. A few hours later Israeli warplanes attacked Hamas facilities and smuggling tunnels in Gaza, Hamas said. No one was injured.

Earlier Netanyahu told MPs: "It could be that this matter will entail exchanges of blows, and it may take a certain period of time, but we are very determined to strike at the terrorist elements and deny them the means of attacking our citizens."

The bombing was swiftly condemned by the Palestinian prime minister, Salam Fayyad, who said the "terrorist operation" damaged the Palestinian cause and contradicted "our people's legitimate endeavour to gain its freedom by peaceful means".

Barack Obama criticised the bombing but also expressed condolences to the families of Palestinians killed in recent Israeli air strikes in Gaza. "There is never any possible justification for terrorism," he said. "The United States calls on the groups responsible to end these attacks at once and we underscore that Israel, like all nations, has a right to self-defence."

But he added: "We also express our deepest condolences for the deaths of Palestinian civilians in Gaza yesterday. We stress the importance of calm and urge all parties to do everything in their power to prevent further violence and civilian casualties."The US defence secretary, Robert Gates, said he did not believe the bombing would cause the situation in Israel deteriorate.

"It's obviously a horrific terrorist attack. I extend sympathy to the families of those who have been injured. But I think, I don't think I would characterize the situation there as deteriorating," Gates said.

There has been relative calm in Israel and the Palestinian territories in the past few years, partly as a result of efforts by Palestinian Authority security forces to rein in militant operations. But in the past week a barrage of missiles has been fired into Israel from Gaza, followed by retaliatory air strikes and tank shelling by the Israeli military. Schools in at least two major Israeli cities were closed for the rest of the week as a series of missiles were fired from Gaza and more were expected. At least 10 Palestinians have been killed.