The bar attack was the latest in a string of deadly street assaults that have killed 13 people and shaken the country.

Israeli forces are on high alert nationwide and there will be "no restrictions" in their fight to "eradicate terror", Israeli Prime Minister Naftali Bennett said in a rare shared statement with the defence and internal security ministers.

Palestinian President Mahmoud Abbas condemned the attack and stressed the dangers of "continuing the repeated incursions into Al-Aqsa Mosque and the provocative actions of extremist settler groups", the Palestinian WAFA news agency reported, a reference to the third-holiest site in Islam.

The officers found the shooter hiding near a mosque in Jaffa, just south of Tel Aviv, Israel's Shin Bet security agency claimed. During an exchange of fire, the alleged attacker was killed, the agency said.

Shin Bet identified the gunman as a 28-year-old Palestinian from Jenin, a city in the occupied West Bank, and claimed he was in Israel without a permit.

Late on Thursday, at the start of the weekend in Israel, the attacker entered a pub on a crowded main street of Tel Aviv and began shooting, killing two people and seriously wounding three before fleeing.

Residents were warned not to leave their homes as hundreds of Israeli security officers, assisted by a helicopter with a spotlight, combed the streets.