The explosion occurred outside the Tzrifin military base at about 6 p.m. local time. Reports say the body of a suicide bomber was found, possibly that of a woman. Many of those waiting at the bus stop were Israeli soldiers.
Israeli security had been on high alert after the wounding of the spiritual leader and founder of the Hamas militant group this weekend.
Israel had indicated earlier Tuesday it would be willing to work with Ahmed Qureia as the new Palestinian prime minister, despite his close ties with veteran leader Yasser Arafat.
Israel initially said after the weekend resignation of Palestinian Prime Minister Mahmoud Abbas that it would not deal with a successor handpicked by Arafat. However, Israeli Prime Minister Ariel Sharon's aides said Tuesday that Qureia could be a partner if he carries out the Palestinians' obligations under a U.S.-backed peace plan, including disarming militants.
"When we have a partner on the other side who is determined to take action against terrorism, then he will find Israel more than forthcoming," said Israeli spokesman Jonathan Peled.
However, Israelis don't expect that to happen, so the prospects for ending three years of conflict appear slim, reports CBS News Correspondent Robert Berger.
For his part, Qureia told Israel's Haaretz newspaper that he wants to achieve a comprehensive cease-fire between Israel and the Palestinians, not just the "hudna" that militant groups agreed to for two months this summer.
However, he is not optimistic about success if he doesn't have international support.
"I want to see the Americans, what kind of guarantees, what kind of support they will give," he said.
In the West Bank city of Hebron, three Palestinians, including a 12-year-old boy, were killed by shrapnel from an Israeli tank shell fired at a suspected militants' hideout, witnesses said. Army Radio reported that one of the adults killed was identified as Ahmed Bader, Hamas leader in the southern West Bank city.
Israeli troops surrounded a seven-story apartment building early Tuesday, apparently in search of wanted men from the Islamic militant group Hamas.
A gun battle erupted and troops blew up a car, witnesses said. Later, soldiers fired several tank shells at the building, witnesses said. Twelve-year-old Thaher Siyouri, who was watching the fighting with his family from the third-floor of a nearby building, was killed — according to hospital doctors by shrapnel from a tank shell that hit his head and neck.
Witnesses said the army sent two Palestinians into the building at one point, apparently to search it. Israel's Supreme Court has outlawed the practice of using Palestinian civilians as "human shields." The Israeli had no immediate comment on the report. In a similar raid in the West Bank city of Nablus on Friday, witnesses also reported that troops used human shields.
Qureia, the Palestinian parliament speaker and one of the key people who helped negotiate the 1993 Israeli-Palestinian Oslo accord, was tapped Sunday by Arafat to replace Abbas.
Qureia has accepted the post in principle, but says Israel must take action on a U.S.-backed peace plan and that both sides must commit to a cease-fire if he is to succeed. Qureia, also known as Abu Ala, warned that unless Israel lessens its hostility to Arafat and ends lethal airstrikes on militant leaders, he'd be doomed to failure.
It's not for Israel to say who will govern the Palestinians, he told Haaretz.
"I don't tell you whether [right-wing] ministers [Avigdor] Lieberman or [Effi] Eitam should sit in the government," said Qureia. "You must remember that Yasser Arafat is our chosen president, and he's the one who appointed me as the leader of the new government."
Raanan Gissin, a senior adviser to Ariel Sharon, said the Palestinian leadership must halt violence and choose the path of peace if it wants Israel to cooperate.
"The name doesn't matter here ... the policy matters, the strategy matters," Gissin told reporters traveling with Sharon, who is visiting India. "If they will be willing to participate in the process ... they can always call us, they know the phone number."
Sharon's aides, speaking on condition of anonymity, said Qureia could be a partner.