"Two terrorists arrived at the scene in a vehicle armed with firearms, these terrorists opened fire towards civilians at the bus station and were subsequently neutralised by security forces and a nearby civilian," police said.
The attackers came from East Jerusalem, District Commander Doron Turgeman told reporters at the scene.
A large number of ambulances and police converged on the street that was crowded with morning commuters, and police said they were searching the area to make sure there were no other attackers.
The US ambassador to Israel condemned the shooting.
"Abhorrent terrorist attack in Jerusalem this morning. We unequivocally condemn such brutal violence," Jack Lew said.
Israel and Hamas extend truce
The violence came as Israel and Hamas struck a last-minute agreement on Thursday to extend their six-day ceasefire in Gaza by one more day to allow negotiators to keep working on deals to swap hostages held in the coastal enclave for Palestinian prisoners.
The truce has allowed much needed humanitarian aid into Gaza after much of the coastal territory of 2.3 million was reduced to wasteland by Israel's bombardment in response to a deadly rampage by Hamas militants on October 7.
"In light of the mediators' efforts to continue the process of releasing the hostages and subject to the terms of the framework, the operational pause will continue," the Israeli military said in a statement on Thursday, released minutes before the temporary truce was due to expire at 5am (GMT).
Hamas, which freed 16 hostages in exchange for 30 Palestinian prisoners on Wednesday, said in a statement the truce would continue for a seventh day.
The conditions of the ceasefire, including the halt of hostilities and the entry of humanitarian aid, remain the same, according to a Qatar foreign ministry spokesperson. Qatar has been a key mediator between the warring sides, along with Egypt and the United States.
Before the agreement, both Israel and Hamas had said they were preparing to resume fighting as negotiations over the next batch of hostages to be released hit an impasse.
"A short time ago, Israel was given a list of women and children in accordance with the terms of the agreement, and therefore the truce will continue," the Israeli prime minister's office said in a statement just as the truce was due to expire.
Hamas earlier said Israel had refused to receive a further seven women and children and the bodies of three other hostages in exchange for extending the truce.
Hamas did not name those killed but had said on Wednesday a family of three Israeli hostages, including the youngest hostage, 10-month-old Kfir Bibas, had died during Israel's bombardment of the enclave.
Israel has sworn to annihilate Hamas, which rules Gaza, in response to the October 7 rampage by the militant group, when Israel says gunmen killed 1200 people and took 240 hostages.
Before the truce, Israel bombarded the territory for seven weeks and killed more than 15,000 Palestinians, according to health authorities in the coastal strip.
US Secretary of State Antony Blinken had arrived in Tel Aviv earlier on Thursday, his third trip to the region since the October 7 attack, to discuss extending the pause in fighting, humanitarian aidand the exchange of more hostages.
Ninety-seven hostages have been freed since the start of the truce, according to a Reuters tally. The Israeli military says 145 hostages remain in Gaza.
On Wednesday night, two Russian citizens and four Thai citizens were released outside the framework of the agreement while the 10 Israeli citizens freed included five dual nationals, officials said. They were a Dutch dual citizen, who is also a minor, three German dual citizens and one US dual citizen.
United States President Joe Biden was determined to secure the release of all hostages held by Hamas after American Liat Beinin was freed on Wednesday, the White House said in a statement.
The US is urging Israel to narrow the zone of combat and clarify where Palestinian civilians can seek safety during any Israeli operation in southern Gaza, US officials said on Wednesday, to prevent a repeat of the massive death toll from Israel's northern Gaza attacks.
United Nations Secretary-General Antonio Guterres warned on Wednesday the Gaza Strip was in the midst of an "epic humanitarian catastrophe," and he and others called for a ceasefire to replace the temporary truce.
Jordan will host a conference attended by the main UN regional and international relief agencies on Thursday to coordinate aid to Gaza, official media said.
China called on the Security Council on Thursday to formulate a "concrete" timetable and roadmap for a two-state solution to achieve a "comprehensive, just and lasting" settlement of the Palestinian issue.