For decades, Israel has been in conflict with the Palestinians, who have been seeking diplomatic recognition for their independent state on the territories of the West Bank, including East Jerusalem, which is partially occupied by Israel, and the Gaza Strip.
The attack came as the US officially shuttered its consulate in Jerusalem, downgrading the status of its diplomatic mission to the Palestinians by folding it into the US Embassy to Israel.
"This is the last nail in the coffin" of peacemaking, veteran Palestinian negotiator Saeb Erekat said on Twitter.
It will be merged with the U.S. embassy to Israel, where a new Palestinian affairs unit will operate.
Palestinians were outraged when the US moved its embassy from Tel Aviv to Jerusalem, calling it a recognition of the city as the capital of a Jewish state.
The merging of diplomatic missions "does not signal a change of USA policy on Jerusalem, the West Bank, or the Gaza Strip", State Department Deputy Spokesperson Robert Palladino said on Sunday.
Secretary of State Mike Pompeo announced the move in October.
The ultimate responsibility for relations with Ramallah falling on United States ambassador to Israel David Friedman.
But Palestinian leaders have seen the decision as another move against them by US President Donald Trump's administration, which they froze contact with after his 2017 decision recognizing Jerusalem as Israel's capital.
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State Department spokesman Robert Palladino said the decision was driven by operational efficiency and there would be "complete continuity of US diplomatic activity and consular services". "The specific boundaries of Israeli sovereignty in Jerusalem are subject to final status negotiations between the parties".
Israeli soldiers have been the targets of multiple car-ramming attacks in the area in recent years, with the number peaking in late 2015 and early 2016.
Palestinians view him - along with Trump's administration - as blatantly biased in favour of Israel.
Trump's decision to move the embassy to Jerusalem broke with decades of global consensus that the status of the city must first be decided upon through negotiations by Israel and the Palestinians.
Trump, who is expected to release his long-awaited peace plan in the coming months, has also cut more than $500 million in Palestinian aid in a bid to force Palestinian leaders to negotiate.
Trump's son-in-law, Jared Kushner, announced last month that the USA would unveil the deal after Israeli elections in April.
Israel regards the entire city, including the eastern sector it captured in the 1967 Middle East war and annexed, as its 'eternal and indivisible capital, ' but that is not recognized internationally.
The status of Jerusalem goes to the heart of the Israeli-Palestinian conflict.