A digger has reportedly struck a passenger bus and overturned it in the Kikar Zvihl in Jerusalem in a possible terrorist attack.

The driver was shot dead by police after he killed a pedestrian and injured five other people. Police described the incident as "terrorist attack", indicating that they suspected Palestinian involvement, according to AP.

Palestinian sources identified the driver as Muhammed Naif El-Ja'abis, 19, from the East Jerusalem neighborhood of Jabel Mukaber.

Police spokesman Micky Rosenfeld said a police officer in the area opened fire and killed the attacker. Public security minister Yitzhak Aharonovitch said that the alleged terrorist "was known to security forces from a separate incident".

Palestinian militant group Hamas has issued a statement in which it welcomes the rampage and encourages similar terrorist attacks. "No permission is required," it said, according to Voice of Israel radio.

Kikar Zvihl is an ultra-Orthodox Jewish neighbourhood in the city.

Tensions have been high between Arabs and Jews in the region amid a month-long war between Israel and Palestinian militants in the Gaza Strip.

In the past, Palestinian attackers have gone on deadly rampages with bulldozers in Jerusalem traffic.