A suicide bomber struck a bus on Thursday in Jerusalem, killing 10 bystanders and wounding about 50 in an attack near Prime Minister Ariel Sharon's official residence, police and paramedics said.

Nobody claimed responsibility. The explosion coincided with a German-brokered prisoner swap between Israel and the Lebanese guerrilla group Hezbollah, although it was not clear if the two were connected.

The explosion went off just before 9 am in the Rehavia district in downtown Jerusalem, just 15 yards from Sharon's official residence. Sharon was at his farm in southern Israel at the time, his aides said.

Sharon's spokesman, Raanan Gissin, said the attack illustrated why Israel is building a contentious separation barrier in the West Bank. Israel says the structure is needed to keep suicide bombers out of Israel. "The rest of the world should sit back and let us do what we need to do to defend ourselves," Gissin said.

The bomber was in the back of the bus when he detonated the explosives, Jerusalem Police Chief Mickey Levy said.

"It was a very serious attack on a bus packed with passengers," Levy said at the scene. "According to what we know at the moment ... we're talking about a suicide bomber."

The green Egged bus was charred, with wires dangling everywhere. One side of the bus had been blown out and the back half of the roof was blown off.

Police investigators with sniffer dogs searched the bus. Paramedics were taking away the wounded on stretchers. Others were treated at the scene. People, dazed and crying, wandered around the area. One crying woman said she had been walking down the street when she heard a loud explosion.

Stephane Ben Shushan, who owns a chocolate store in the upscale neighborhood, was walking to work when the explosion went off.

"It's indescribable," he said. "It's a real nightmare, you can smell the blood." He said traffic was heavy and the bus was driving slow at the time.

The explosion came just two days after senior Egyptian officials made another attempt to win a pledge from Palestinian militants to halt attacks on Israelis. The attack was a further setback to international efforts to cause a resumption of peace talks. The U.S.-led "road map" peace plan has been stalled almost since its inception in June.

Palestinian Authority officials condemned the bombing. "This vicious cycle can only be broken by renewal of a meaningful peace process," said Palestinian negotiator Saeb Erekat. "Otherwise, violence will breed violence, bullets will breed bullets."

The last attack in Israel was a suicide bombing at a bus stop outside of Tel Aviv on Dec. 25 that killed four people.

On Wednesday, Israeli troops clashed with Palestinian militants in fierce, prolonged street battles across Gaza City, killing eight Palestinians. The flare-up of violence complicated a new U.S. effort to restart peace talks.

The deaths - and subsequent demands for reprisals at angry funeral processions - jeopardized modest moves toward reviving the U.S.-backed "road map" peace plan and threatened yet another escalation in more than three years of Palestinian-Israeli violence.

Palestinian leaders complained the fighting frustrated the first high-level U.S. diplomatic mission in a month, by envoys John Wolf and David Satterfield. They met with Palestinian Prime Minister Ahmed Qureia in the West Bank city of Ramallah in a bid to revive long-stalled peace efforts.

The fighting on a chilly, cloudy day began near the isolated Jewish settlement of Netzarim in the heart of the crowded, poverty-stricken Gaza Strip.

The army said militants fired anti-tank missiles and set off a bomb, prompting the troops to fire back. Two Palestinians were killed in that first skirmish, said Dr. Moawia Hassanein, a Palestinian hospital official.

The army then entered a Gaza City neighborhood near Netzarim, and a fierce battle began. Six other Palestinians were killed and several were wounded, Hassanein said.

A rocket-propelled grenade whizzed just a few yards in front of two Israeli tanks, leaving a streak of white smoke. The tanks swiveled their barrels and fired machine guns.

During the long battle with an unusually large force of as many as 200 Palestinian gunmen, an armored Israeli bulldozer uprooted a small patch of olive and orange trees, and tanks crushed some parked cars.

At least five of the dead were armed men, including four from the Islamic Jihad group and one from Hamas, and three were believed to be bystanders, hospital officials said. Israel's military said no soldiers were hurt and claimed all the Palestinian dead were armed.

Also Wednesday, thousands of Palestinians jammed the streets of Gaza to mourn the dead. Some fired weapons in the air, and women watched from balconies as the bodies, wrapped tightly in flags of Islamic groups, were hoisted above the crowd on stretchers.

Islamic Jihad vowed to avenge the killing of its gunmen. Hamas said the "barbaric Zionist aggression is a greeting and a reception for the American delegation."

Wolf and Satterfield urged Qureia to meet soon with Sharon. Qureia has balked at a summit until he gets assurances it will produce results. Also, he was hoping to present Sharon with a Palestinian agreement for a truce, but he has been unable to secure a deal.

The United States has promoted the road map, which envisions the formation of a Palestinian state in 2005, but neither side has carried out its initial requirements.

Instead, Israel continued planning unilateral measures if peace talks remain stalled.

Sharon has pledged to impose a new boundary on the Palestinians if peace efforts don't bear fruit in coming months. He has not yet released details of the plan, but said it would include moving Jewish settlements in the West Bank and Gaza.

The United States and the Palestinians have rejected Sharon's idea of unilateral steps, insisting moves must occur through negotiations.

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