The driver also drove his vehicle into a bus, pushing it onto its side, in the haredi section of East Jerusalem's Sheikh Jarrah neighborhood.
The terrorist shot by police was identified as Muhammed Naif El-Ja'abis, an East Jerusalem resident with a long criminal record. The pedestrian killed was an unidentified 25-year-old man. Six other pedestrians and the bus driver were treated for minor injuries.
Moshe Cohen, who witnessed the incident, said the suspect was ordered to stop by police and was shot multiple times after he refused the order.
"An officer came with a gun and shot him, but he didn't stop, so he shot him again and again," Cohen said.
Hundreds of police and soldiers swept through the area after the incident, witness Yitzi Isaac said. Israeli Internal Security Minister Yitzhak Aharonovitch warned that similar incidents, motivated by the conflict in Gaza, were possible in the capital city.