Four Israelis were killed and several injured as two men armed with a pistol and meat cleavers attacked a West Jerusalem synagogue.
The two Palestinians who carried out the attack, Jerusalem's deadliest in six years, were shot dead.
Israel's PM Benjamin Netanyahu has vowed a harsh response.
He ordered the homes of the attackers to be destroyed and called for the people of Israel to stand together in the face of a "wave of terror".
Jerusalem has seen weeks of unrest, partly fuelled by tension over a disputed holy site.
Three of the victims were dual Israeli-US nationals, the US state department has confirmed, while the fourth was a dual Israeli-UK citizen. The funerals of the four men - all rabbis - have been held in Jerusalem, with thousands in attendance.
Mr Netanyahu said this was a "terrible attack at a time of prayer" and condemned what he termed the "shouts of joy" from the Palestinian-controlled Gaza Strip after the attacks.
He said he was strengthening security on the streets of Jerusalem, without giving details.
Mr Netanyahu called on the people of Israel to "stand together as one" but added that it was "forbidden for anybody to take the law into their own hands, even if their blood is boiling".
Earlier, the office of Palestinian President Mahmoud Abbas issued a statement saying: "The presidency condemns the attack on Jewish worshippers in their place of prayer and condemns the killing of civilians no matter who is doing it."
US President Barack Obama also condemned the attack, saying: "There is and can be no justification for such attacks against innocent civilians."
The Abu Ali Mustafa Brigades, the military wing of the Popular Front for the Liberation of Palestine, said it had carried out the attack.
Analysis by Kevin Connolly, BBC News, Jerusalem
Jerusalem has been a place of division fiercely contested by rival religious traditions for many hundreds of years.
In the last few weeks, tensions have risen sharply - largely as the result of the revival of an ancient dispute over rights of worship at a site within the walls of the Old City.
Muslims call the site al-Haram al-Sharif and believe it is the place where the Prophet Muhammad ascended into heaven - to Jews it is Temple Mount and marks the place where the sacred temples of their faith stood in ancient times.
By a long-standing tradition, Muslims alone have the right to pray at the site, although people of other faiths may visit.
The issue is of such sensitivity that even when Israel captured the Old City of Jerusalem during the war of 1967 it handed control of the compound back to an Islamic religious authority which continues to administer it to this day.
In recent times, some religious Jews have begun to argue for a change in the status quo which would also allow them to pray there. Any hint of such change is viewed with deep anger in the Islamic world.
'I tried to escape'
The attack happened at the Bnei Torah Kehilat Yaakov synagogue and religious seminary site on Harav Shimon Agassi Street - home to a largely Orthodox Jewish community in the Har Nof neighbourhood.
The victims were Moshe Twersky, 59, head of the seminary, Arieh Kupinsky, 43, and Kalman Levine, 55, all of whom also held US passports. The fourth victim, Avraham Goldberg, 68, was also a UK citizen.
Police say there was a shoot-out with the attackers when officers reached the scene.
Pictures posted online by an Israeli military spokesman show a bloodied meat cleaver and bodies lying between desks and chairs on a bloodstained floor, their faces covered with their prayer shawls.
"I tried to escape. The man with the knife approached me. There was a chair and table between us... my prayer shawl got caught. I left it there and escaped," one of the surviving Israelis told Channel 2 television.
Popular Front for the Liberation of Palestine (PFLP)
- Palestinian militant group founded in 1967, committed to the destruction of Israel
- Carried out high-profile attacks in 1960s and 1970s, including airline hijacking; assassinated Israeli Tourism Minister Rehavam Zeevi in 2001
- Lost influence with its rejection of the 1993 Oslo peace accord, and the rise of Islamist groups like Hamas
- Leader Ahmed Saadat was imprisoned by the Palestinian Authority in 2002, but was seized by Israeli troops in 2006 and taken to Israel
- Has continued to attack Israeli forces on the frontier with Gaza and to launch rockets into southern Israel
Palestinians have identified the attackers as cousins Uday and Ghassan Abu Jamal.
In the Gaza Strip, some people distributed sweets to celebrate. Hamas, which controls Gaza, and another militant group, Islamic Jihad, praised the attack.
Hamas said it was in revenge for the death of a Palestinian bus driver found hanged inside a vehicle in Jerusalem on Monday.
Israeli police said it was a case of suicide, but the man's family did not accept the post-mortem findings.
After the attack, there were reports of clashes in the Jabal Mukaber district of East Jerusalem, as Israeli security forces moved in to make arrests that included some members of the attackers' family.
Police are also investigating reports that a Palestinian man was stabbed in the leg by three Jewish attackers in central Jerusalem.
Tensions in the city have risen in recent weeks, with two deadly attacks by Palestinian militants on pedestrians in the city and announcements by Israel of plans to build more settler homes in East Jerusalem.
The Jerusalem compound that has been the focus of much of the unrest - known to Jews as the Temple Mount and to Muslims as al-Haram al-Sharif - is the holiest site in Judaism, while the al-Aqsa Mosque within the compound is the third holiest site in Islam.
Orthodox Jewish campaigners in Israel are challenging the long-standing ban on Jews praying at the compound.
Palestinians want East Jerusalem, occupied by Israel since 1967, as the capital of a future state.