A bulldozer driver went on a rampage in Jerusalem on Tuesday, hitting vehicles near a hotel where U.S. Democratic presidential candidate Barack Obama was due to stay later in the day, before he was shot dead.

Police described the incident -- which took place while Israeli President Shimon Peres hosted Palestinian President Mahmoud Abbas at Peres's official residence less than a kilometre (half-mile) away -- as a "terrorist" attack.

It was the second bulldozer attack in Jewish west Jerusalem in less than a month. Emergency services said at least 11 people were injured, one seriously.

There was no immediate claim of responsibility.

©Dudi Vaaknin

"The bulldozer driver left a construction site and hit two cars," a police spokesman said, without identifying him.

"A civilian who saw what was happening shot him. The bulldozer continued on its way. A border police patrol ... continued to shoot and the terrorist was killed," the spokesman said.

"The first thing I saw is that he tried to smash the head of a passerby with the (bulldozer's) shovel. Then he zigzagged down the street, smashing into cars," said eyewitness Moshe Feiglin.

A similar attack in Jerusalem killed three Israelis on July 2 before the Palestinian bulldozer driver was shot dead by an off-duty soldier and police.

Obama was due to arrive in Israel later in the day and stay at the King David Hotel, a couple of blocks from the scene of the latest attack.

After the incident a yellow bulldozer, cordoned off by police, stood at the intersection of King David and Keren Hayesod streets. One car had been overturned and at least one other heavily damaged.

The bulldozer used in the attack was smaller than the one involved in the July 2 incident.