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The victims killed included three Americans and a British citizen, Israeli police said.

There was no immediate word on their identities but Israel’s leading ultra-Orthodox website said all four, who had dual Israeli nationality, were rabbis.

“Regarding citizenship, there were three Americans and the fourth was British,” police spokeswoman Luba Samri said.

Israeli Prime Minister Benjamin Netanyahu last night said there would be a “harsh response” to the incident, which he said was incited by Palestinian leader Mahmoud Abbas.

US Secretary of State John Kerry said such an attack was “act of pure terror and senseless ­brutality”.

Palestinian leader Mahmoud Abbas condemned the killings but Hamas welcomed the attack, describing it as a fitting “response” to Israeli actions in annexed East Jerusalem.

The attack came a day after a Palestinian bus driver in Jerusalem was found hanged in his vehicle — which many Palestinians believe was a lynching by Jewish extremists, but Israel insists was a suicide.

Hamas, which governs the Gaza Strip, said the synagogue attack was a response to “the murder” of the driver.

The synagogue attack, which began shortyly before 7am (4pm AEDT) was a further escalation of violence in Jerusalem.

The attackers — cousins Uday and Ghassan Abu Jamal from the East Jerusalem neighbourhood of Jabal Mukaber — were shot dead as they tried to escape. Both were in their 20s.

Two policemen were among the four killed, shot in a gunfight with the attackers.

One worshipper in the synagogue told Israel’s Channel 2 he was lucky to escape.

“The man with the knife approached me,” he said.

“There was a chair and table between us — my prayer shawl got caught. I left it there and ­escaped.”

The attack occurred during morning prayers in the synagogue in the southwestern Jerusalem neighbourhood of Har Nof — an area with a large ultra-orthodox community.

Police spokeswoman Luba Samra said: “Two terrorists, apparently from East Jerusalem, entered a yeshiva in Har Nof and attacked worshippers with axes and a pistol. The two terrorists were ­neutralised.”

The attack came a day after riots in East Jerusalem triggered when bus driver Yusuf Hasan al-Ramuni was found hanged in what his family and a co-worker believe was murder.

Israeli police said an autopsy on the 32-year-old father showed he had committed suicide.

Bus driver Muatasem Fakeh said he “saw signs of violence on his body”. “He was hanged over the steps at the back of the bus in a place where it would be impossible to hang yourself alone.”

The death of the bus driver set off new clashes between Palestinian youths and Israeli security forces in East Jerusalem.

In recent weeks the death toll has been rising as tensions have dramatically escalated.

The latest round of hostilities began after key figures in Mr Netanyahu’s Likud party — Moshe Feiglin and Tzipi Hotovely — urged Jewish activists to visit the compound in Jerusalem’s Old City that houses the Al-Aqsa mosque. While most rabbis insist Jews should not pray there as it leads to violence, the activists insisted they should, triggering confrontations in the Old City and around Jerusalem.

The EU has drawn up a document outlining possible sanctions against European companies that do business in the West Bank, which has been under Israeli military occupation since 1967.

Israel’s Haaretz newspaper reported that after a series of announcements of new settlement building in the West Bank several European countries regarded as friends of Israel had decided to take action. It said the EU was examining responses to “acts by the Israeli government that are liable to make the two-state solution an impossibility”.

After a meeting in Brussels, the 28 members of the EU issued a statement. “Recalling that settlements are illegal under international law, the EU and its member states remain committed to ensure continued, full and effective implementation of existing EU legislation and bilateral arrangements applicable to settlement products. The EU closely monitors the situation and its broader implications and remains ready to take further action to protect the viability of the two-state solution.”

EU foreign policy chief Federica Mogherini said the document obtained by Haaretzwas “hypothetical” and that the EU’s aim was to encourage dialogue between Israelis and Palestinians.

Additional reporting: agencies