The driver of a bulldozer crushed a police car and hit a bus on a busy Jerusalem road on Thursday before police and a taxi driver shot him dead, police and hospital officials said.

Police spokesman Micky Rosenfeld called it a "terrorist" attack.

An open Koran, the Muslim holy book, was found in the driver's cabin, Niso Shaham, Jerusalem's deputy police chief, told reporters at the scene.

Israel's Army Radio identified the driver as a Palestinian.

No Palestinian militant groups have claimed responsibility for the incident, which came a day after a visit by U.S. Secretary of State Hillary Clinton.

However, the Islamist movement Hamas said the attack was a "natural response" to Israel's demolition of Palestinian homes in Arab East Jerusalem and to the Jewish state's offensive in the Gaza Strip.

"The operation in Jerusalem was a natural response to aggression against our people. The Zionist enemy should realise that they alone bear the responsibility for displacing our people in Jerusalem and for the killings in Gaza and the West Bank," said Mushir al-Masri, a senior Hamas official.

Police and witnesses said the driver of the bulldozer first turned over a police car, crushing its roof.

The bulldozer then slammed the police car into a large bus but no one was hurt, police said.

Two police officers, who were inside the vehicle that was crushed, were lightly injured, medics said.

None of the students on the bus were injured.

Rosenfeld would not identify the bulldozer driver, saying an investigation was underway. He was not carrying any identification, police said.

Nir Barkat, Jerusalem's mayor, said he would recommend that authorities take "the harshest measures we can take by law" against those involved in the attack.

Israel has previously threatened to demolish the homes of Palestinian attackers.

Police compared Thursday's attack to three similar incidents last year, two with bulldozers and one with a BMW car.

In the 2008 incidents, which police also called "terrorist" attacks, the drivers were identified as Palestinians from Arab East Jerusalem.

Rosenfeld said police stepped up security across Jerusalem following the incident, which took place on a major road that cuts across Jerusalem.

One witness, who identified himself as Shai, said the bulldozer driver was shot by both a policeman and a civilian who was later identified by police as a taxi driver.

Health officials said the bulldozer driver was taken to an Israeli hospital, where he was pronounced dead.