Jerusalem  - A Palestinian stabbed to death an elderly Israeli passerby Thursday, and wounded a police officer, in the Jewish settlement of Gilo, south of Jerusalem, police said.

The Palestinian was stopped by two police officers and asked to identify himself, but he drew a knife and stabbed one of the officers.

The officer then shot the stabber, but he escaped and while running away fatally stabbed a second Israeli, an 86-year-old civilian whom he ran into, a witness who chased after the attacker and overpowered him said.

The stabber, shot in the stomach, was in moderate condition, as was the police officer, who was stabbed in the back. The passerby died of his wounds in hospital.

"I saw the police van by the side of the road, about 30 metres away from me. I saw the policeman grappling with someone. I stopped my car. Suddenly I see the Arab trying to stab the policeman anywhere he could and the policeman trying to both defend himself and to reach his gun at the same time," the witness, Yoav Mizrahi, said.

"The policeman, who fell, had fired at the terrorist. He got up on his feet and began to shoot him," Mizrahi said.

"I saw the policeman stop shooting and fall down again, and I ran after the terrorist. Suddenly an elderly man came toward us, he looked about 80. The terrorist stabbed him on the upper right side of of his chest and continued to run. The man fell down," he said.

Jerusalem police chief Aharon Franko said the attacker was not a Jerusalem resident and Palestinian radio reported that he came from a village south of Bethlehem, in the southern West Bank.

It was not known if he acted of his own accord, or on behalf of a militant organization.

Gilo, a suburb south of Jerusalem on the road to Bethlehem, is located within the city's municipal boundaries and considered a Jewish neighbourhood of the disputed city by Israel.

Built on occupied West Bank land, it is regarded as a Jewish settlement by Palestinians and the international community.

Israel wants to keep its main Jewish settlement blocks in and around Jerusalem as part of a future peace deal with the Palestinians. (dpa)