Thursday's was the first such attack in Israel since a truce expired at the end of last year.
The bombing was also the first since Ariel Sharon, the Israeli prime minister, was incapacitated by a stroke on 4 January, and could put pressure on interim leader Ehud Olmert to launch strong reprisals as Palestinians prepare for parliamentary elections next week.
The bomber targeted a small, open-air sandwich stand on a busy pedestrian mall near Tel Aviv's old central bus station.
One witness said the man wore a backpack and pretended to be blind before detonating his explosives.
The blast tore down the ceiling of the restaurant.
The authorities said the bomber was the only fatality but one
person was seriously injured. The other injuries were mostly light to moderate, medics said.
Israeli media said Palestinian resistance group Islamic Jihad claimed the bombing.
But in the Gaza Strip, senior Islamic Jihad leader Khaled al-Batsh said he could neither confirm nor deny responsibility but praised the bombing.
The blast happened at a sandwich
stand on a pedestrian mall
"Regardless of who carried out the attack, it was a natural response against the continued Israeli assassination of fighters and killing of innocents," he said.
Islamic Jihad has claimed responsibility for other recent bombings in Israel.
It was the sixth human bombing in Israel since a truce took effect last February. On 5 December, a bomber detonated explosives outside a shopping mall in the Israeli coastal town of Netanya, killing five Israelis.
Mahmoud Abbas, the Palestinian president, said the bombing was meant to derail next week's Palestinian parliamentary elections.
"This is sabotage and aimed at sabotaging the elections, not only the elections, but also the security of Palestinians," Abbas said at his office in the West Bank city of Ram Allah.
"The culprits must be punished. They aim to sabotage the elections and the efforts of the Palestinian Authority to impose law and order."
A Palestinian has been shot dead by Israeli troops near the southern West Bank town of Hebron.
Zyad Zhor, 20, was killed on Thursday as he threw a Molotov cocktail in the village of Bait Kahil, just north of Hebron, Palestinian security said.
Three more incendiary devices were found near his body, the source said, adding that another Palestinian who had also been attacking Israeli vehicles was arrested.
The death brings to 4934 the number of people killed since the outbreak of the second Palestinian uprising against the Israeli occupation in September 2000. More than three-quarters of the dead are Palestinian.
Also on Thursday the Palestinian Authority took receipt of 100 military vehicles donated by the Qatari government.
Tawfik Abu Khosa, of the Palestinian Interior Ministry, said the vehicles would help solve the shortage of transportation for police and security forces.