The deadly attack occured at the Sarona Market in Israel's commercial capital, injuring five people.
Two Palestinians opened fire at a popular Tel Aviv nightspot near Israel's military headquarters police said, killing four people in one of the worst attacks in a months-long wave of violence.
The shooting spread panic, and video posted on social media showed a uniformed officer firing a handgun, though his target could not be seen.
Police on Wednesday said one of the attackers was arrested, while the other was wounded by gunfire and undergoing surgery. Five people were injured in addition to the four killed at the Sarona Market in Israel's commercial capital, police said.
Israeli authorities said the two attackers were cousins from the Hebron area in the occupied West Bank. The market and complex of bars and restaurants is located across the street from Israel's defence ministry and main army headquarters. The nighttime shooting led police to clear the area.
Police said the wounded included those sitting at a coffee shop in the complex. The assailants' weapons had been retrieved by officers, they said.
"We are talking here about a pretty serious terrorist incident," Tel Aviv police chief Chico Edri told reporters. "Of the two terrorists, one was arrested and the other wounded by gunfire," he said. "We do not know of another terrorist at large and so from our point of view people can return to their normal lives," he added.
The nationalities and other details of the victims were not yet known. The United States (US) called it a "horrific terrorist attack."
"These cowardly attacks against innocent civilians can never be justified. We are in touch with Israeli authorities to express our support," State Department spokesman Mark Toner said.
UN Special Coordinator for the Middle East peace process, Nickolay Mladenov, immediately condemned the shooting. "All must reject violence and say no to terror," he said in a statement. "I am also shocked to see Hamas welcome the terror attack.
Leaders must stand against violence and the incitement that fuels it, not condone it." A spokesman for Tel Aviv Mayor Ron Huldai quoted him as saying "we will not be able to put a policeman on every street corner".
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 "An Israeli policeman clears the area after a shooting attack took place in the center of Tel Aviv June 8, 2016.")
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