Dwayyat drove the 20-tonne earthmoving vehicle for 500 metres (yards) along Jaffa Road, rolling over cars, crushing some occupants, and ramming into a crowded number 13 bus, flipping it on its side with his mechanical shovel.
Dramatic television footage showed the vehicle later at a standstill and a policeman in the cab, as rescue workers and passersby surveyed the wreckage. However, the bulldozer started moving again and a struggle could be seen inside the cab.
A man in civilian clothes leapt aboard and fired a pistol into the cab, followed by a helmeted policeman in body armour who fired an automatic rifle. The officer later said he fired twice at the wounded driver to ensure he was no further threat.
"The only way to stop him was with a bullet to the head," witness Moshe Oren said afterwards. "We were relieved."
Israeli government spokesman Mark Regev said the attack "was an act of senseless, murderous violence". An aide to Abbas called it an attempt to wreck peace negotiations and urged Israel to show restraint in its response.
Abbas's opponents in Hamas and Islamic Jihad said the attack was a "natural" response by Palestinians to Israeli aggression but, nearly two weeks into a truce in the Gaza Strip, neither Islamist group said it was responsible for the incident.
U.S. President George W. Bush called Olmert to offer condolences, Israeli spokesman Regev said.
Medical officials said more than 40 people were taken to hospital. Police at first identified the dead as two Israeli men and a woman, but then corrected this to one man and two women.
BLOODSHED
It was the first Arab attack in Jewish west Jerusalem since a gunman killed eight students on March 6 at a rabbinical seminary a short distance from Jaffa Road.
The scene in the aftermath of the incident was reminiscent of suicide bombings that destroyed buses on Jaffa Road during a wave of attacks in 1996 and during the first years of a Palestinian uprising that began in 2000.
Since then, fatal attacks on Israelis have become relatively rare, despite frequent rocket and mortar fire from Gaza. Israeli forces have killed more than 360 Palestinians this year, mostly in Gaza. More than 100 of the Palestinian dead were civilians.
Hamas spokesman Sami Abu Zuhri said in Gaza his group did not expect the attack to "influence the Gaza calm".
"There is a continued aggression against our people in the West Bank and Jerusalem and so it is natural that our people there will respond to such aggression," he said.
Hamas's allies, Islamic Jihad, said in a statement: "The Jerusalem Brigades bless the heroic operation in Jerusalem as the natural reaction to the crimes of the occupation."
Unlike Palestinians in the blockaded Gaza Strip and in the occupied West Bank, those living in occupied east Jerusalem have free access to the Jewish west of the city and to Israel.
Arab and Jewish populations do not mix extensively, but thousands of Palestinians work on Israel's roads and building sites. The gunman who attacked the seminary in March was from east Jerusalem. That attack was claimed by Hamas officials.
At Gaza's border crossing with Egypt, Egyptian forces used water cannon and Hamas security forces had to restrain a crowd jostling for access during a brief opening of the Rafah crossing point between the Palestinian enclave and its Arab neighbour.
Some Palestinians threw stones at Egyptian forces and also complained of Hamas's failure to speed their passage to Egypt, the only access to the outside world for most Gazans, who are blocked from other land, sea and air routes by Israel.
