The blast, the first serious violence in the run-up to the Jan. 9 election, triggered a lengthy battle between soldiers and Palestinian militants. Two militants were killed in Israeli air strikes, and two others were believed dead. Seven people, including two teenagers, were wounded, Palestinian officials said.
Musher al-Masri, a Hamas spokesman, said the attack was a "natural response to the continuous Israeli crimes against our people and against our fighters."
Meanwhile, with a month to go, the race to succeed longtime Palestinian leader Yasser Arafat is tightening up.
CBS News Correspondent Robert Berger reports two opinion polls show interim leader Mahmoud Abbas running neck-and-neck with militant leader Marwan Barghouti. The 69-year-old Abbas is the candidate of the ruling Fatah movement, which believes he can revive the peace process.
By contrast, the 45-year-old Barghouti is serving five life terms in an Israeli jail on terrorism charges. That makes him unacceptable to both the U.S. and Israel, so Fatah is pressuring Barghouti to drop out of the race.
Abbas, in turn, has tried to persuade militants to suspend attacks on Israelis ahead of Palestinian presidential elections Jan. 9. The main militant groups, Hamas and Islamic Jihad, have not given a specific promise, but there had been expectations that they would not disrupt Abbas' efforts.
Barghouti threw the election scene into turmoil with his sudden entry into the race last week just before the filing deadline, although associates said he might yet withdraw in exchange for reform promises from Abbas.
Palestinian Cabinet minister Kadoura Fares, who is close to Barghouti, raised the possibility that Barghouti might withdraw in exchange for promises by Abbas to give a greater say to young Fatah activists.
"A month is a long time," Fares said, referring to the campaign. "If Barghouti withdraws his candidacy and lets Abu Mazen (Abbas) win, it shows that Abu Mazen needs to forge an alliance with the younger generation."
Israel has so far said he would not be released, but a Barghouti victory would put heavy pressure on Israel to release him.
Acting campaign manager Saed Nimr said Barghouti's incarceration would not stop him from serving as president. "He will appoint a strong prime minister and a strong vice president," Nimr said. "They will be visiting him from week to week to get instructions."
However, Palestinian officials say that according to the Palestinian constitution, Barghouti cannot function as president from prison, because one of the president's legal obligations is to attend sessions of the Palestinian parliament.
Three surveys released Monday showed that Abbas, once thought to be an easy winner in the election, is no longer an automatic winner.
In a poll by the West Bank's Bir Zeit University, Barghouti scored 35 percent, compared to 34 percent for Abbas. A survey by the Palestinian Center for Policy and Survey Research, headed by independent pollster Khalil Shikaki, said Abbas had 40 percent support, compared with 38 percent for Barghouti.
Only one survey, by the Palestinian Center for Public Opinion run by pollster Nabil Kukali, gave Abbas a comfortable lead of 40 percent, compared to 22 percent for Barghouti.
The polls quoted margins of error of 3 or 3.1 percentage points, and the huge discrepancies were not explained.