A Palestinian man in a bulldozer ran amok in one of the most exclusive areas of central Jerusalem, wounding as many as 16 people as he rammed a bus and crushed cars in his path.

The rampage in a JCB digger was the second such attack in Jerusalem this month, and ended in the same way, with a civilian and a policeman pulling their guns and shooting the driver dead.

The attack took place on the street outside the King David hotel, where Gordon Brown had been staying less than 24 hours earlier, and where Barack Obama, the Democratic presidential candidate, is due to stay on his brief trip to Jerusalem.

Crushed and overturned cars lined the street while the huge yellow digger stood motionless and askew, its windows bullet-holed and splashed with blood.

Just a few streets away, Mahmoud Abbas, the Palestinian president, was holding his first meeting with Shimon Peres at the Israeli president’s Jerusalem residence, to discuss ways of reinvigorating the flagging peace process.

The attacker was named as Ghassem Abu Tir, from a village on the edge of occupied East Jerusalem. Israeli reports suggested he was a relative of a Hamas MP Mohammed Abu Tir, who is currently in an Israeli jail. Coming just three weeks after another Palestinian bulldozer driver killed three people and wounded 45 in an identical attack, the rampage left residents badly shaken.

“I am afraid. When we pass a tractor trailer now I am afraid,” said Sandy Lerner, a 65-year-old woman who witnessed the chaotic scene. “Our government is doing nothing to protect the citizens of this country.”

Her husband Kenny, 67, saw the huge digger careering down the busy street and ran after it, but stopped as bullets started smacking into the cab.

“I thought maybe I could something to stop it. I saw him hitting into cars and then the police came,” he said. “They started to shoot into the cabin where the driver was. After a while it became dangerous because you didn’t know who was going to get possibly hit.”

Nathan Sterman, 16, was in an apartment just off the main road and he heard the initial crashes and ran downstairs. He said: “The guy seemed to be deliberately aiming at the cars and waiting for cars to be in his sight and then ran into them. He tried to kill everyone, he didn’t care if it was a man, a grandma or a baby.”

Police said two children were among the wounded.

“You throw terrorists out the door, they climb through the window with all kinds of means and ideas,” said the city’s mayor, Uri Lupolianski, while visiting the scene. “Every working tool becomes a means of terror and we must rethink how we employ those working here.”

Rattled witnesses to the frenzied attack called for tighter controls on Palestinians driving construction vehicles. But with so much building going on in the city, and Palestinians from East Jerusalem providing much of the cheap labour, the task would be complicated.

Even as police sealed off the site, another huge digger driven by a Palestinian man pulled up and workmen spread sand from its shovel across the oil slicks from the wrecked cars. A Jewish religious student with a British accent shouted out at the driver: “It wasn’t you, was it?” The driver sat impassively at the wheel, ignoring the jibes.

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