A Palestinian construction worker at the wheel of a digger went on a rampage in central Jerusalem today, killing at least three people and injuring 45 in an act that brought terror back to the streets of Israel.

Hossam Dwayyat, a 31-year-old Arab resident of East Jerusalem, wrought havoc on one of Jerusalem’s main thoroughfares, driving into oncoming traffic and leaving a trail of mangled vehicles in his wake.

He was caught on film as onlookers saw him take a digger from his construction site and plough through cars queuing on Jaffa Street. The bulldozer overturned one bus and struck another before Dwayyat was shot dead by security officers. He had driven more than 200 yards towards Jerusalem’s bustling Mahne Yehuda souk before he was stopped.

“I saw him coming towards me and I froze,” said Chava Shimoni, a 24-year-old student who was making her way to lunch in the market. “I could see his eyes and he looked so focused. A man shoved me out of the way. It was a miracle that I survived.”

Ms Shimnoni was one of dozens of civilians who rushed to the victims of the attack, helping screaming victims out of the overturned bus and passing water bottles to those in shock.

All three people killed were women. Their bodies were covered in plastic sheets as they lay trapped in the debris of their vehicles. One of the women was reported to have saved her baby girl’s life by throwing her out of the window seconds before the bulldozer hit.

Dwayyat, who had a criminal record, was working legally on a construction site near Jerusalem’s central bus station when he turned his digger off the site and into oncoming traffic on Jaffa Street. He wrecked half a dozen cars and hit a bus before aiming his vehicle at another bus that was almost full of commuters.

He used the digger’s massive serrated scoop to overturn the bus and repeatedly rammed its side. A number of armed men, including police officers, off-duty soldiers and armed civilians, momentarily stopping him by opening fire.

At least three men then jumped on to the bulldozer as Dwayyat slumped over the steering wheel, apparently incapacitated. But he came to and the bulldozer lurched forward before Moshe Plesser, an off-duty soldier who had climbed to the side of the vehicle, shot at close range.

“He yelled ‘Allah akhbar!’ and hit the gas,” Mr Plesser said. “I did what is expected of any soldier or civilian.”

Eli Mizrahi, an officer in a special anti-terrorist unit, then fired several more shots. “I ran up the stairs \ and, when he was still driving like crazy and trying to harm civilians, I fired at him twice more and, that’s it, he was liquidated,” Mr Mizrahi said.

Dwayyat’s body could be seen lying outside the door of the digger with blood at his feet.

Palestinian militant groups claimed responsibility for the attack, although Israeli police said initial evidence suggested that Dwayyat was a “terrorist acting on his own”.

It is the first major attack on Jerusalem since March, when Alaa Abu Dhein, a 25-year-old resident of the East Jerusalem neighbourhood of Jabel Mukaber, attacked the Mercaz Harav seminary. Police drew parallels between the attacks, which they said could mark a trend in Arab residents of East Jerusalem using their identification cards and freedom of travel to western Jewish neighbourhoods to carry out attacks.

Three organisations claimed responsibility for the attack: the al-Aqsa Martyrs’ Brigade, loosely affiliated with the Fatah movement; the Galilee Freedom Battalion; and the Popular Front for the Liberation of Palestine.

Hamas, which has a fragile ceasefire with Israel, did not take responsibility but praised the attack a “natural reaction” to Israeli aggression.

An Israeli Foreign Ministry official said that the incident could damage recent peace moves. “We are trying to convince the people that we need a ceasefire with Hamas in Gaza, and that we need to strengthen Fatah in the West Bank . . . Each attack furthers the public perception that no peace can be established with the Arabs,” he said.

David Miliband, the Foreign Secretary, called the attack horrific. “Our first thought is for the victims and the relatives of the victims,” he said. “Our second thought is obviously for the process of building a Middle East peace that’s enduring and viable and combines security for Israel and justice for the Palestinians and the creation of a Palestinian state.”

Dwayyat’s family, including his wife and two children, were questioned by police. Tayseer Dwayyat, his father, told journalists before he was led away by police: “My son never spoke of plans to carry out such an attack. If he had I would have tried to prevent it.”

Ehud Olmert, Israel’s Prime Minister, has begun efforts to raze Dwayyat’s home and stop social security benefits to his family. The Israeli parliament also passed a first reading of a Bill today that would revoke the citizenship of anyone convicted of terrorist activity.