Initial reports on Israel television channels and Israel Radio said the blast occurred shortly before noon in Shaul Hamelech Street in the heart of Tel Aviv. Officials reported at least 21 people hurt, one seriously.
Eli Binn, director general of Magen David ambulance service, told Israel's Channel 10 paramedics were treating the injured and transferring them to hospitals. Police sappers cordoned off the area and searched to make sure there were no additional bombs at the site.
Police said they are searching for two suspects believed to be involved in the attack.
Initial reports indicate a person flagged the bus down and, when the driver opened the rear door, threw a bag containing a bomb in the bus and fled. The bomb exploded seconds later.
Hamas said the attack was in response to the killing of Palestinians in Gaza, Israel Radio said.
In recent days the Israeli security establishment expressed concern that Operation Pillar of Defense, now in its eighth day, could trigger militants in the West Bank to carry out attacks inside Israel.
The United States issued a statement condemning the attack.
"These attacks against innocent Israeli civilians are outrageous. The United States will stand with our Israeli allies, and provide whatever assistance is necessary to identify and bring to justice the perpetrators of this attack," the White House statement said.