A gunman opened fire at a popular bar in the central Israeli city of Tel Aviv this afternoon, killing two and wounding at least three others before fleeing, police said.

Nati Shakked, owner of the Simta bar on Dizengoff Street, said the assailant had waited on a bench outside before taking a machine-gun out of a bag and "shooting in every direction."

The motive for the New Year's Day attack on a busy main street was not immediately clear, and it was not known if it was a gangland shooting.

Police spokeswoman Luba Samri said the two people who died were among the five wounded.

Israeli medics remove a wounded person from the scene of the shooting. A motive hasn't been determined. (Nir Elias/Reuters)

She said a massive manhunt was underway for the gunman. Large police forces were deployed at the scene.

Israeli Channel 10 TV aired CCTV footage obtained from a shop near the bar that shows the man purported to be the shooter.

The man, with short hair, glasses and a black bag over his shoulder, scoops up some cashew nuts, puts them in a plastic bag and then empties them back. The footage then shows the man walking toward the entrance of the store, placing his backpack on a shopping cart, and taking a gun out of it. He steps outside and starts shooting, then runs away.

Channel 10 and other Israeli media later Friday claimed the attacker's identity was known to authorities.

The station's defence analyst, Alon Ben-David, said the gunman was an Israeli Arab, and that the attacker's father had seen his son on TV and notified authorities.

Ben-David said the gunman's calm demeanour, and the way he was holding and shooting the gun show he was well trained.

According to Ben-David, a Qur'an, the Muslim holy book, was found later in the attacker's bag. Channel 10 later spoke to a man it identified only as Ahmed who it said was a relative of the shooter. The man described the shooter as "traumatized" after a cousin was killed by police in 2006, and who had served time in Israeli prison after allegedly grabbing an officer's gun.

The Associated Press, however, could not independently confirm those details.

Tel Aviv Mayor Ron Huldai visited the wounded in hospital, and later said he spoke with those who were able to talk.

He said that inside the bar, "friends were celebrating a birthday and a man opened fire at them from the outside."

The pub where the shooting took place in Tel Aviv was hosting a birthday gathering, according to the mayor. (Nir Eliaz/Reuters) Huldai said "lessons will be learned" to improve security.

Israel has seen a wave of Palestinian street attacks against Israeli civilians and soldiers since October, fuelled in part by anger over stepped-up Jewish visits to Jerusalem's al-Aqsa mosque complex, also sacred to Jews, as well as long-stalled peace talks.

On the Israeli side, 21 people have died, mostly in stabbings, shootings and car-ramming attacks.

At least 131 Palestinians have been killed by Israeli fire, 90 of them identified by Israel as assailants. The rest died in clashes with security forces.

Channel 10 reported that an assault rifle was used in Friday's attack.