At least three people were killed in what police suspect was a Palestinian attack in the central Israeli city of Elad on the country's independence day.
Witnesses and emergency responders said the attackers used axes.
Police set up roadblocks to try to catch the assailants who fled the scene, about 15 km (9 miles) from Tel Aviv. On television, Elad's mayor urged residents to stay indoors while security forces were still operating.
Health officials said three people were killed and two others were being treated with serious slash wounds.
"The joy of Independence Day was cut short in an instant. A murderous attack in Elad that shocks the heart and soul," Israeli Foreign Minister Yair Lapid posted on Twitter. "We will not give in to terror."
Palestinian President Mahmoud Abbas condemned the attack. The official Palestinian news agency WAFA quoted him as saying "the killing of Palestinian and Israeli civilians will only lead to more deterioration of the situation."
There have been a spate of Arab street attacks in Israel in recent weeks.
Prior to Elad, Palestinians and members of Israel's Arab minority had killed 15 people, including three police officers and a security guard, in attacks in Israel and the West Bank that have mostly targeted civilians.
Israel has responded with arrest raids in Palestinian towns and villages which have often sparked clashes and brought the number of Palestinians killed by Israeli forces since the beginning of the year to at least 40.
The casualties include armed members of militant groups, lone assailants and bystanders.
Earlier on Thursday, confrontations again broke out between Palestinians and Israeli police at Al-Aqsa Mosque compound in Jerusalem's Old City, though they were far more limited than clashes that had erupted weekly over the past month.
Jewish visitors were allowed in to the area on Thursday after their entrance to the site had been suspended for the last 10 days of the Muslim holy month of Ramadan.
Hamas, the Islamist Palestinian group that controls Gaza, praised the Elad attack, but did not claim responsibility. It said the attack was a response to Israeli actions at the Jerusalem holy site.
Yehya Al-Sinwar, Gaza Hamas chief, said earlier this week: "Whoever has a rifle must have it ready, and whoever doesn't have a rifle must prepare his knife or his axe."
Al-Aqsa mosque is Islam's third-holiest site. The compound is Judaism's holiest site and the vestige of two ancient Jewish temples.