Israeli police say an explosive device was left in a telephone booth near the city's central bus station.
The blast reverberated throughout Jerusalem and blew out the windows of two crowded buses. Rescuers removed bloodied people from the area on stretchers, as sirens from speeding ambulances wailed in the background.
No one has claimed responsibility, but Israeli authorities blame Palestinian militants.
The Western-backed Palestinian government in the West Bank condemned the attack.
Tensions have been rising in recent weeks, particularly along Israel's southern border with the Gaza Strip. Hamas, the militant group that controls Gaza, has been firing rockets and mortar shells across the border, and Israel retaliating with airstrikes and other attacks.
The Associated Press contributed to this report.