Reports said an explosives-filled car went off near the bus, which was traveling during rush hour near the coastal town of Hadera. The bus was engulfed in flames after the blast, which prevented police and rescue workers from approaching the vehicle immediately.
The militant Palestinian group Islamic Jihad claimed responsibility for the attack -- the first suicide bombing since October 10th. Israeli leaders blamed the bombing on Palestinian Chief Yasser Arafat, who condemned the attack. President Bush also condemned the attack, saying peace must be pursued and violence must be stopped.
Earlier, the Israeli military said its troops shot dead two Palestinians during a gun-battle near the Jewish settlement of Kfar Darom in the Gaza Strip. The army says soldiers believed the gunmen were trying to infiltrate the settlement.
Meanwhile, U-S Middle East envoy William Burns is in Saudi Arabia, where he's continuing a two-week, 12-nation tour to discuss regional issues -- including the Israeli-Palestinian conflict.
Mr. Burns is to meet with Israeli officials this week and hold separate talks with a Palestinian delegation.
In another development, Israeli troops have been involved in skirmishes with hard-line Jewish settlers in the West Bank at the site of a small unauthorized outpost near Nablus. A group of settlers has defiantly returned to the dismantled settlement to rebuild it.
Scores of security personnel and settlers have been injured since Saturday when troops forcibly removed settlers from the outpost (Havat Gilad).