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police said Friday they had shot dead a Ìýgunman who killed two people and wounded several others in Tel Aviv sparking an overnight manhunt, the latest in a surge of violence.

The attacker had shot at revellers at a bar on the busy Dizengoff Street in the coastal city of just after 9:00pm on Thursday, triggering chaos as people fled in panic.

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The Palestinian movement Hamas, which controls the Gaza Strip, and the Islamic Jihad, praised the attack.

Israel's Shin Bet security agency named the assailant as Raad Hazem, 28, from Jenin in the north of the Israeli-occupied West Bank.

Special forces found the attacker "hiding near a mosque in Jaffa", referring to the historically Arab quarter of Tel Aviv, according to the Shin Bet.

Israeli Prime Minister Naftali Bennett praised the security forces for their response.

"We maintain maximum alertness, within Tel Aviv and throughout the country, for fear of further incidents or imitation attacks," Bennett said.

The Magen David Adom medical emergency service said 16 people had been taken to hospital, including "two dead, four seriously wounded," and adding it remained "on high alert".

Tel Aviv's Ichilov Hospital, which was treating eight people injured in the shooting, said Friday morning that one of the victims was "in critical condition with an immediate risk to his life".

Immediately after the attack, police had closed roads and ordered public transport shut down as they hunted for the suspect, with more than 1,000 officers and Israeli soldiers deployed.

Heavily armed forces roamed the streets lined with cocktail bars and fashion boutiques, as the city's normally bustling roads were emptied.

Noa Roberts, 21, who works at a bar across the street from the attack, said she heard dozens of bullets as terrified customers and staff scurried to shelter.

"We all ran in the back, it was so scary," Roberts said. "You hear real shooting, it was like a nightmare."

She said 50 people cowered for two hours until police told them they could leave.

"My boss has a gun and he joined the police to help them," she added.

US Secretary of State Antony Blinken condemned the "terrorist attack" and said Washington stood with Israel "in the face of senseless terrorism and violence."

This was the fourth fatal attack in Israeli cities in two weeks, with 13 victims killed in the violence.