Three women and one man, all in their twenties, were killed and 17 others were wounded, police said.
Israeli Prime Minister Benjamin Netanyahu said the attacker, who was shot dead by soldiers, was a suspected supporter of so-called Islamic State.
But the prime minister gave no evidence to support the claim.
The victims, three army cadets and one officer, were taking part in an educational trip. the Israeli military said.
Jerusalem Mayor Nir Barkat called on residents not to "let terror win" and said militants would "pay a heavy price".
"There is no limit to the cruelty of the terrorists who are willing to use any means possible to murder Jews and to damage the life routine of Israel's capital," he said.
The US state department condemned the attack "in the strongest possible terms" and the European Union also issued a condemnation.
The Palestinian militant group Hamas praised the attacker. Hamas spokesman Abdul-Latif Qanou called it a "heroic" act and encouraged other Palestinians to "escalate the resistance".
Before this latest incident, 35 Israelis had been killed in a wave of knife, gun and car-ramming attacks by Palestinians or Israeli Arabs since October 2015.
More than 200 Palestinians - mostly attackers, Israel says - have also been killed in that period.
Israel says Palestinian incitement has fuelled the attacks. The Palestinian leadership has blamed frustration rooted in decades of Israeli occupation.
The BBC's Yolande Knell in Jerusalem says the number of attacks had begun to subside in recent months, but Sunday's incident is one of the most serious there has been.
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