(Adds Bush reaction paragraphs 13-14)

By Alastair Macdonald

JERUSALEM, March 6 (Reuters) - A Palestinian gunman opened fire in a Jewish religious school in Jerusalem on Thursday, killing at least eight people and wounding about 10 in the most lethal attack in Israel in two years, emergency services said.

"It was a slaughterhouse," said Yehuda Meshi-Zahav, head of the Zaka emergency service after surveying the scene at the Merkaz Harav seminary, one of the most prominent Jewish educational centres in the holy city.

Jerusalem police chief Aharon Franco said a lone gunman carried out the attack and was killed by an off-duty Israeli army officer who lives nearby and ran to the school after hearing gunfire. Police had said earlier there were two gunmen.

There was no immediate claim of responsibility for the attack, but it was greeted with celebrations in the Gaza Strip, where a recent Israeli offensive killed more than 120 Palestinians, about half of whom were identified as civilians.

The United Nations, Washington, France and Germany condemned the attack in the strongest terms, and diplomats said the U.N. Security Council would discuss the attack at an extraordinary session at 2400 GMT.

Israeli media reports said the gunman was a resident of Arab East Jerusalem. The school is in the Jewish western part of the city.

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 condemned the Jerusalem attack.

Witnesses said the gunman entered the crowded seminary and fired an automatic weapon at students in its library. Franco said the attacker killed eight people.

Police said it appeared most of the dead were in their 20's.

"He hid the weapon in a cardboard box," Franco said.

Emergency worker Yerach Tucker said bloodied students ran 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 most lethal attack in Jerusalem since 2004 and caused the highest Israeli death toll since April 17, 2006, when 11 people were killed in a suicide bombing during the Passover holiday in Tel Aviv.

UN, U.S., EUROPEAN CONDEMNATION

President George W. Bush condemned the attack "in the strongest possible terms" and said he had spoken with Israeli Prime Minister Ehud Olmert to offer condolences.

"I told him the United States stands firmly with Israel in the face of this terrible attack," he said in a statement.

U.N. Secretary-General Ban Ki-moon "condemns in the strongest terms today's savage attack ... and the deliberate killing and injuring of civilians ..." Ban's spokeswoman Michel Montas said in a statement issued in New York.

"(He) is deeply concerned at the potential for continued acts of violence and terrorism to undermine the political process, which he believes must be pursued to achieve a secure and lasting peace for Israelis and Palestinians, based on a two-state solution."

The U.N. press office said the Security Council would hold an extraordinary session at 7 p.m. (2400 GMT) to discuss the Middle East, and diplomats said the attack would be discussed.

"I condemn this criminal act in the strongest possible terms," said German Foreign Minister Frank-Walter Steinmeier. "We offer our sympathies to the families and loved ones of the victims ..."

French Foreign Minister Bernard Kouchner also condemned "the horrific attack" and said "... France calls for the continuation of negotiations with a view to creating a Palestinian state living in peace and security alongside Israel. There is no alternative to a negotiated political solution to bring this conflict to an end."

Yitzhak Dadon, who told reporters that he shot the gunman, said the attacker, wearing torn jeans, fired at the students with an AK-47 assault rifle. Witnesses said the shooting spree went on for about five minutes.

"I saw the gunman and he fired a long burst in the air. But then he disappeared," Dadon said. "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."

Some 50 ambulances raced to the area in scenes reminiscent of a series of suicide bombings in Jerusalem after a Palestinian uprising began in 2000. Students at the school were attending a study session marking the start of Adar, the most festive month of the Jewish calendar.

Outside the seminary, a crowd shouted "Death to the Arabs".

In the Hamas-controlled 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 cross-border rocket fire.

Sami Abu Zuhri, a Hamas official, said the group "blesses the heroic operation in Jerusalem, which was a natural reaction to the Zionist massacre".

A loudspeaker in Gaza City blared the message: "This is God's vengeance." (Additional reporting by Ari Rabinovitch and Adam Entous in Jerusalem and Nidal al-Mughrabi in Gaza; writing by Jeffrey Heller; editing by Tim Pearce)

AlertNet news is provided by