JERUSALEM - A Palestinian suicide bomber blew himself up in a downtown Jerusalem shopping area yesterday in an anti-Israeli attack that killed two bystanders. At least 60 were wounded, police said.

In response to the blast, Israel canceled a round of U.S.-brokered cease-fire talks with the Palestinians planned for later yesterday.

The explosion went off at the foot of the city's tallest office tower, on King George Street near the site of several other recent shooting and bombing attacks.

The Al Aqsa Brigades, a militia linked to Yasser Arafat's Fatah faction, claimed responsibility. The Bush administration said late yesterday it is taking steps to designate the militia as a foreign terrorist organization.

The attacker, Mohammed Hashaika, had been jailed for attempting to carry out an earlier attack. But the Palestinians released him last week when Israeli troops entered the West Bank city of Ramallah, where he was being held.

The bombing came a day after an Islamic militant set off explosions on a crowded bus in northern Israel, killing himself and seven others.

After Wednesday's bus attack, Israeli and Palestinian security officials met overnight but failed to reach a truce to stop 18 months of violence. There was no immediate sign whether the cancellation of yesterday night's session meant future meetings were also off.

The United States has been pushing both sides hard for a truce, which would allow Arafat, the Palestinian leader, to attend next week's crucial Arab summit in Beirut, Lebanon, where Saudi Arabia was to present an Arab peace plan.

President Bush said yesterday he was "disappointed" with Arafat's response to calls for an end to attacks on Israel. "We set some strong conditions and we expect Mr. Arafat to meet those conditions," Bush said in the Oval Office. Vice President Dick Cheney, who met Israeli Prime Minister Ariel Sharon on a visit to the region this week, said he would not meet Arafat unless the Palestinian leader complies with U.S. demands he work to stop violence.

U.S. envoy Anthony Zinni, who brokered the truce talks, met yesterday with Sharon and was to hold talks later with Defense Minister Binyamin Ben-Eliezer.

In a rare step, Arafat personally condemned the bombing. Looking downcast as he read a statement from his desk, the Palestinian leader said, "We strongly condemn this military operation ... especially since it was against innocent Israeli civilians."

He said his officials would "take the appropriate and immediate measures to put an end to such attacks" and promised to "exert every possible effort to make the mission of Gen. Zinni a success." But Arafat's statement fell short of the clear cease-fire call the United States has demanded.

Israel held Arafat responsible for yesterday's attack, saying he has done nothing to rein in militants.

"This is the Palestinian reaction to the good-faith measures of the Israeli government that included a lack of a response to the terrorist attack yesterday," said Gideon Meir, a government spokesman. Arafat "is trying to draw Israel into a harsh reaction, to win points with world public opinion."

In a telephone call to The Associated Press, a man claiming to be from the Al Aqsa Brigades identified the suicide bomber as Hashaika, 22, of the West Bank village of Talooza, north of the city of Nablus.

The bomber had raised suspicions of pedestrians in the area, a witness, Adi Aluz, told Israel's Channel 1 TV. He said the suspect was wearing a denim coat with a hood and kept smiling and looking backward.

"I told two cops about him, what he was wearing. They started following him," Aluz said. "By the time they got to him he was already at King George Street. By that time, he blew up."

Shocked bystanders hugged each other, some crying or holding their hands to their faces as ambulances, sirens wailing, evacuated the wounded.

Jerusalem Police Chief Mickey Levy said the blast killed three people, including the assailant, and wounded more than 60.

One Arab man was led away from the scene by police. It was not immediately clear whether he was being protected from angry bystanders who gestured and yelled at him, or whether he was a suspect.

On Wednesday, a Palestinian suicide bomber blew himself up on an Israeli commuter bus, killing himself and seven other passengers. The militant Islamic Jihad group claimed responsibility.

Yesterday's session of talks would have been the third this week in the U.S. effort to obtain a cease-fire based on an agreement brokered last year by CIA chief George Tenet.

Rajoub, who participated in the earlier rounds, said he was on route to the planned meeting yesterday when U.S. officials informed him Israel had called it off. Yarden Vatikay, an adviser to Ben-Eliezer, confirmed the meeting was off, but would not say who made the decision.

After Wednesday night's talks, Israelis and Palestinians remained far apart. Israel wants to implement the steps in a truce plan over four to five weeks - double the time envisioned by the Palestinians, participants said.

Israel says in the first stage, the Palestinians must disarm militias and arrest suspected militants, while the Palestinians insist Israel first withdraw troops to positions they held before the outbreak of fighting in September 2000.

One Palestinian official, who spoke on condition of anonymity, said Zinni was working on a bridging proposal for a session today.

Both sides had expressed some optimism that a truce might be reached before Monday, when the Palestinians hoped for a Cheney-Arafat meeting. But Cheney said yesterday that such a meeting "will depend on whether or not Arafat is complying" with U.S. demands.

Sharon has said Israel will not allow Arafat to attend the Beirut summit unless a cease-fire is reached. Arafat has been confined in Ramallah by Israeli troops for months.

Saudi Arabia has said it will not submit its peace initiative for Arab leaders' approval in Beirut unless Arafat is there. The Saudi plan offers Israel peace with the Arab world in exchange for a withdrawal from all occupied territories, and it has been welcomed by the United Nations and the European Union.

Earlier yesterday, Israeli troops raided three Palestinian-controlled villages near the West Bank town of Jenin. Palestinian officials said more than 20 people were arrested.

Earlier this week, under U.S. pressure, Israel withdrew from Palestinian-run territory seized in recent weeks in the largest Israeli military operation in a generation, aimed at hunting down suspected militants.