Details were still emerging, but police said there were two attackers, with one arrested and another wounded by gunfire and undergoing surgery.
A video posted on social media showed a uniformed officer firing a handgun, although his target could not be seen.
Other footage showed people running away from the area in panic.
A hospital nearby said at least three people were killed, with a total of nine having earlier been reported wounded at the Sarona Market in Israel's commercial capital.
The market and complex of bars and restaurants is located across the street from Israel's defence ministry and main army headquarters.
The nighttime shooting led police to clear the area.
"We are talking here about a pretty serious terrorist incident," Tel Aviv police chief Chico Edri told reporters.
"Two terrorists arrived at the complex and while firing and to our regret nine people were injured to different degrees."
"Of the two terrorists, one was arrested and the other wounded by gunfire," he said.
A medic with United Hatzalah rescuers, in an account relayed by the rescue service, said: "When I arrived at the scene I saw two young people who were suffering from gunshot wounds outside of a restaurant at the Sarona centre.
"We treated them as well as numerous other individuals who were suffering from shock."
The nationalities and other details of the victims were not yet known.
Violence since October has killed at least 207 Palestinians, 28 Israelis, two Americans, an Eritrean and a Sudanese.
Others were killed in clashes or by Israeli air strikes in the Gaza Strip.
Shooting attacks such as the one that occurred today night have been rare, though Tel Aviv has seen two other major incidents in recent months.
In March as US Vice President Joe Biden visited, a Palestinian went on a stabbing spree along the Tel Aviv waterfront, killing an American tourist and wounding 12 people.
On January 1, an Arab Israeli killed three people in a shooting spree in Tel Aviv.
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