The Israeli and Palestinian envoys at the UN traded charges at an open Security Council meeting held on Monday.
The meeting followed the recent upsurge in Israeli attacks in Gaza and after a Palestinian suicide bomber struck a crowded fast-food restaurant in Tel Aviv, killing nine and wounding dozens in the deadliest bombing in more than a year.
Israel said a new "axis of terror" - Iran, Syria and the Hamas-run Palestinian government - was sowing the seeds of the first world war of the 21st century.
Dan Gillerman, Israel's ambassador, told the Security Council that Monday's "horrific act of terrorism as well as the ones that preceded it are the direct result of the new axis of terror" made up of Iran and Syria and the "terrorist organisations they have been harbouring, nurturing, financing and supporting, namely Hamas and Hezbollah".
Recent statements by Hamas leaders - refusing to recognise Israel, and by Iran's president who said on Saturday that Israel was a "rotten, dried tree" that was "on the road to being eliminated" - represented "the stated goal of this axis of terror", which was again executed in Monday's bombing, he said.
Dark cloud looming
"Each day extreme fundamentalist leaders are inciting more acts of terrorism," Gillerman said.
"A dark cloud is looming above our region, and it is metastasising as a result of the statements and actions by leaders of Iran, Syria, and the newly elected government of the Palestinian Authority."
A Palestinian bomber killed nine
Israelis in Tel Aviv on Monday
"These recent statements ... are clear declarations of war, and I urge each and every one of you to listen carefully and take them at face value," he added.
The Palestinian envoy accused Israel of an escalating military campaign using indiscriminate force to kill civilians and entrench its occupation.
Riyad Mansour, the Palestinian UN observer, condemned Monday's bombing and the loss of innocent civilians on both sides, but attacked Israel for trying to portray its latest military escalation, which killed 21 Palestinians from April 7 to 9, as a response to violence from the Palestinian territories.
"Israel, the occupying power, has been relentless in its grave breaches of international law, including the willful killing and injury of civilians and the practice of extrajudicial executions," he said.
"What the Israeli government is doing and what it has been doing throughout its nearly 39-year-old military occupation is clearly intended to serve its clear political objectives of inflicting maximum pain, suffering and loss on the Palestinian people while it entrenches its occupation," Mansour said.
He urged the Security Council and the international community to condemn the Israeli attacks and take measures to halt the latest escalation.
Gillerman said that since January, 11 major suicide attacks had been prevented and 90 potential suicide bombers had been arrested.
From April 7 to 9, 21 Palestinians
were killed in Israeli assaults
While Israel regrets any loss of life, it will not allow "human bombs" or rockets to penetrate the country and kill Israelis, and he asked whether every country would not do the same to eliminate a similar danger.
Kofi Annan, the UN secretary-general, called the escalating violence "very worrying" and urged both sides to avoid putting civilians at risk.
He also announced that the Quartet of Middle East peacemakers - the UN, the US, the European Union and Russia - would meet in New York on May 9 to discuss how to move the stalled peace process forward.