The 19-year-old gunman, believed to have deserted in protest against the Gaza pullout this month, opened fire as the bus passed through Shfaram.

Prime Minister Ariel Sharon called the incident a reprehensible act by a "bloodthirsty terrorist".

The gunman was beaten to death by a crowd of people who stormed the bus after his weapon ran out of bullets.

Israel is preparing to pull its settlers and soldiers out of the Gaza Strip and correspondents say there have been fears of attacks by Jewish settlers opposed to the pullout.

'Deserter'

The gunman, Eden Nathan Zaada from the Jewish settlement of Tapuah in the West Bank, wore his army uniform and a skullcap.

According to one eyewitness, the soldier opened fire while talking to the bus driver, who is thought to be one of those killed.

The 19-year-old is said to have deserted his army unit with his gun

At least 12 people were wounded in the shooting, some seriously.

Mohammed Barakeh, an Israeli Arab member of parliament, said at the scene that the dead were Israeli Arabs and all residents of Shfaram.

Israel media are reporting that the army said Mr Zaada had a "problematic background". He was believed to be a member of the outlawed extremist Kach party.

He is said to have deserted his unit a few weeks ago, after refusing to take part in the evacuation of Jewish settlements.

The father of the gunman, Yitzhak Nathan Zaada, said he had asked the army to find his son.

"I wasn't afraid he would do something," he told the Associated Press news agency, adding that his son had told him he would find the time to return his gun.

Protest fear

Israel's chief of police has dispatched an extra 2,000 officers and urged all Israelis to remain calm.

Moshe Karadi asked people to await an official inquiry into the incident.

Mr Sharon condemned the attack.

"This terror incident is a deliberate attempt to harm the relations between the citizens of Israel," he said.

"Terror between civilians is the most dangerous thing for the future of Israel and its democratic stability," he added.

Settler groups have also denounced the violence.

"Murder is murder is murder, and there can be no other response but to denounce it completely and express revulsion," Bentsi Lieberman, the head of a settlers' council, told AP.

The bloodiest single attack on Palestinians by a Jewish extremist dates back to 1994 when US-born Jewish Baruch Goldstein shot dead 29 Muslims at a mosque in the West Bank city of Hebron.