Officials said they were suspending entry permits for 83,000 Palestinians during the holy Muslim month of Ramadan in a move that was likely to further stoke tensions following the shooting last night that shocked Israelis.
The attack saw two Palestinians dressed in black open fire as patrons sat at a cafe terrace at the Sarona Market in Israel's commercial capital, police said.
A witness said it seemed at least one of the gunmen had been sitting at the cafe before standing with a rifle and firing.
Five people were wounded in addition to the four killed, and the shooting spread panic, with police clearing the area and crowds running for cover.
Details on the victims were not yet clear.
Police said one of the attackers was arrested, while the other was wounded by gunfire and had undergone surgery.
The market and complex of bars and restaurants is located across the street from Israel's defence ministry and main army headquarters.
Prime Minister Benjamin Netanyahu visited the scene of what he called the "cold-blooded terrorist murder" after returning from a trip to Moscow and conferred with senior colleagues, including newly installed hardline defence minister Avigdor Lieberman.
"There will be intensive action by the police, the army and other security services, not just to catch every accomplice to this murder but also to prevent further incidents."
Police said the two attackers were cousins from the Hebron area in the West Bank, and one of the Israeli authorities' first moves was to revoke tens of thousands of entry permits.
"All permits for Ramadan, especially permits for family visits from Judea and Samaria to Israel, are frozen," said a statement from COGAT, the defence ministry unit which manages civilian affairs in the occupied West Bank.
It said that 83,000 Palestinians would be affected, adding that hundreds of residents of the Gaza Strip who had received permits to visit relatives and holy sites during Ramadan would also have access frozen.
It said it had frozen permits for 204 relatives of one of the alleged attackers.
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