JERUSALEM, July 3 (Reuters) - Israeli Prime Minister Ehud Olmert wants to destroy the home of a Palestinian who killed three Israelis in a bulldozer rampage then was himself shot dead at the scene, an Israeli government official said on Thursday.

Olmert told defence and justice chiefs he was "very worried" Wednesday's attack and the fatal shootings of eight seminary students in March had been perpetrated by Palestinians from Arab East Jerusalem, who carry Israeli identity cards that give them wide freedom of movement, the official said.

"We must use a punishment that would deter. We have to act with a tough hand, to negate social rights, to immediately destroy the homes of every terrorist from Jerusalem," Olmert said, according to the official.

Israel abandoned the demolitions of homes of Palestinians involved in attacks on Israelis, in a pledge to the Supreme Court in response to petitions by human rights groups against the procedure. Any renewal of the policy would likely draw legal challenges.

Defence and legal officials met on Thursday to discuss the demolition issue. Some 20 people live in the bulldozer driver's family home, relatives said.

Israel annexed Arab East Jerusalem in a move not recognised internationally, after capturing the area in a 1967 war, and gave Palestinians there the same blue identity cards issued to Jewish and Arab citizens of the Jewish state.

Palestinians want East Jerusalem as the capital of a would-be state they have been pledged under a U.S.-backed peace plan. (Writing by Allyn Fisher-Ilan; Editing by Caroline Drees)

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