A three-month-old girl was killed and eight other people were injured when a car hit them at a Jerusalem tram stop.
Police say the driver was a Palestinian from East Jerusalem. He was shot by officers as he tried to run away and later died of his injuries in hospital.
Officials say they are treating it as a "terrorist attack" and that the suspect had previously served time in an Israeli prison "for terrorism".
Local media report that the suspect's teenage brother has been arrested.
The baby girl and her parents were US citizens, Jerusalem Mayor Nir Barkat told the Associated Press news agency.
East Jerusalem has experienced months of unrest since a Palestinian teenager was abducted and burned to death in early July, two days after the discovery of the bodies of three Israeli teenagers who were abducted and killed in the occupied West Bank in mid-June.
The killings set off an escalating cycle of violence, leading to a 50-day conflict between Israel and Palestinian militants in the Gaza Strip that claimed more than 2,000 lives.
Earlier on Wednesday, two Israeli soldiers were wounded when unidentified gunmen in Egypt's Sinai fired shots and an anti-tank missile across the border, 60km (40 miles) south of Gaza, according to the Israeli military.
The Israeli military said it returned fire, killing at least three attackers in the Sinai incident. It added that the attack was probably related to drug smuggling.