(Recasts with Jerusalem shooting)
By Alastair Macdonald and Jeffrey Heller
JERUSALEM, March 6 (Reuters) - A Palestinian gunman killed eight people in a Jewish religious college in Jerusalem on Thursday, most of them students, and wounded about 10 others in the most lethal attack in Israel in two years.
The attacker was shot dead by an off-duty Israeli soldier.
"It was a slaughterhouse," said Yehuda Meshi-Zahav, head of the Zaka emergency service, after surveying the scene following five minutes of bloodshed at the Merkaz Harav seminary, one of the most prominent Jewish educational centres in the holy city.
Jerusalem police chief Aharon Franco said the lone gunman was killed by an off-duty army officer who lives nearby and ran to the school after hearing gunfire. A city official said the assailant carried documents identifying him as a resident of Arab East Jerusalem.
There was no immediate claim of responsibility for the attack, but it was greeted with celebrations in the Gaza Strip, where an Israeli offensive in recent days killed more than 120 Palestinians, about half of whom were identified as civilians.
Outside the seminary, young Orthodox Jews in traditional black costume chanted periodically "Death to Arabs!"
Shortly before the shooting, Egyptian officials ended inconclusive talks with leaders of Gaza’s ruling Hamas Islamist movement, part of a U.S.-backed push for a truce between Gaza militants and Israel to halt a surge in violence.
Earlier in the day, an Israeli soldier was killed in a bomb attack in Gaza and four Gaza militants died in an air strike.
The United Nations, Washington, France, Britain and Germany all condemned the school shooting in the heart of Jewish West Jerusalem and the U.N. Security Council prepared to discuss the attack at an extraordinary session late on Thursday in New York.
The United States proposed the Council condemn it as a "terrorist attack" — language Arab states have resisted before.
An Israeli Foreign Ministry spokesman said "terrorists are trying to destroy the chances of peace but we will certainly continue peace talks" with Palestinian President Mahmoud Abbas.
The Palestinian leader also condemned the Jerusalem attack.
Police said the gunman walked freely into the yard of the school, a modern 5-storey complex, shot dead a guard and then sprayed bullets from an AK-47 rifle and a pistol at young men marking a festive period with study in a ground-floor library.
Most of the dead were in their 20s, police said.
"He hid the weapon in a cardboard box," Franco said.
Emergency worker Yerach Tucker said he arrived quickly to see bloodied students run out of the seminary. "I went into the library and there were youngsters lying there, dead with Bibles, with holy books, in their hands," Tucker told reporters.
It was the bloodiest attack in Jerusalem since 2004 and the highest Israeli death toll since April 17, 2006, when a suicide bomber killed 11 people during Passover in Tel Aviv. A month ago, the first suicide bombing in a year killed one Israeli.
U.S. President George W. Bush spoke with Israeli Prime Minister Ehud Olmert to offer condolences: "The United States stands firmly with Israel," Bush said in a statement.
U.N. Secretary-General Ban Ki-moon "condemns in the strongest terms today’s savage attack", a spokeswoman said. Ban had also said this week Israel used "excessive force" in Gaza.
"SHOT IN HEAD"
Yitzhak Dadon, the soldier who told reporters he shot the gunman, said the attacker wore torn jeans: "I saw the gunman and he fired a long burst in the air. But then he disappeared."
"I saw him again when he approached the door of the library. I shot him twice in the head. He started to sway and then someone else with a rifle fired at him, and he died," he said.
In the Gaza Strip, gunmen fired in the air to celebrate the attack, three days after Israel ended a ground offensive it said was aimed at curbing rocket fire. Hamas official Sami Abu Zuhri said the group "blesses the heroic operation in Jerusalem, which was a natural reaction to the Zionist massacre".
A loudspeaker blared the message: "This is God’s vengeance."
Earlier, after meeting Egyptian officials, leaders of Hamas and its ally Islamic Jihad said they would study ceasefire proposals from Cairo but were non-committal. Abu Zuhri said the onus was on Israel to first make a commitment to stop "all forms of aggression" and end its blockade of the coastal enclave.
An end to rocket attacks on Israel and suspension of Israeli raids into the Hamas-run territory would make it easier for Abbas to continue to negotiate peace with the Jewish state.
Abbas, an enemy of Hamas, suspended talks with Israel in protest of bloodshed in Gaza but has indicated he will return.
Israel tightened an embargo on Gaza after Hamas seized the territory from Abbas’s forces in June. The U.N.’s top human rights body passed a resolution on Thursday condemning Israel.
Aid groups said in a report that Israel’s blockade had created the worst humanitarian crisis in the Gaza Strip since Israel captured it in 1967. It pulled out troops in 2005. (Additional reporting by Ari Rabinovitch, Brenda Gazzar and Adam Entous in Jerusalem, Louis Charbonneau at the United Nations and Nidal al-Mughrabi in Gaza; Writing by Jeffrey Heller and Alastair Macdonald; Editing by Michael Winfrey)