Three people were killed in Israel when two Hamas gunmen opened fire at a bus stop during the rush hour on Friday (AEDT), as the final hours of a ceasefire were counting down.

Body bags lay on the street in Jerusalem where a woman in her 20s, a woman in her 60s and a 74-year-old rabbi were gunned down.

Hamas claimed responsibility for the surprise attack. Footage shows Israeli pedestrians fleeing in terror as a stream of gunshots can be heard firing.

Reuters reports the attackers – Palestinians from East Jerusalem – were shot dead by off-duty soldiers and an armed civilian.

Eight other people were wounded in the shooting.

“The terrorists arrived at the scene by car in the morning, armed with an M-16 rifle and a handgun,” police said.

“The terrorists began shooting at civilians before subsequently being killed at the scene.”

The shooting came as a truce between Israel and Hamas was going down to the wire.

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A last-minute deal was struck to extend the ceasefire and hostage exchange for a seventh day.

Israel said it received a list at the eleventh hour of hostages who would go free on Thursday (local time), allowing it to call off plans to resume fighting at dawn.

Two women were returned to Israel after being handed to the Red Cross in Gaza City. Further hostages were expected to be released later in the night.

The freed hostages were 21-year-old Mia Schem, who was seized at a dance party, and 40-year-old Amit Soussana. Schem also holds French nationality.

Amit Soussana and Mia Schem have returned to Israel. Photo: AAP

The warring sides agreed to extend their ceasefire for a seventh day, while mediators pressed on with talks to extend the truce further to free more hostages and let aid reach Gaza.

The truce has halted bombing and allowed some humanitarian aid into Gaza after much of the coastal territory of 2.3 million people was reduced to wasteland in an Israeli campaign in retaliation for a deadly rampage by Hamas militants on October 7.

US Secretary of State Antony Blinken, in Israel during his third visit to the Middle East since the war began, said the truce was “producing results”.

“We have seen over the last week the very positive development of hostages coming home, being reunited with their families. And that should continue today,” he said.

“It’s also enabled an increase in humanitarian assistance to go to innocent civilians in Gaza who need it desperately.”

US officials said Blinken also told the Israelis to ensure the safety of Palestinian civilians once the war resumes.

Egypt’s state media body said Egyptian and Qatari mediators were working to negotiate a further extension of the truce for two days.

So far militants have released 97 hostages during the truce: 70 Israeli women, teenagers and children, each freed in return for three Palestinian women and teenage detainees, plus 27 foreign hostages freed under parallel agreements with their governments.

Israel has sworn to annihilate Hamas, which rules Gaza, in response to the October 7 rampage by the militant group, when Israel says gunmen killed 1200 people and took 240 hostages.

Until the truce, Israel bombarded the territory for seven weeks.

Palestinian health authorities deemed reliable by the United Nations say more than 15,000 Gazans have been confirmed killed, about 40 per cent of them children. A further 6500 are missing, many feared still buried under rubble.

Gazans have been able to use the week-long truce to venture out, visit abandoned and destroyed homes, and dig scores more bodies out of the wreckage.

But residents and international agencies say the aid that has arrived so far is still trivial compared to the besieged enclave’s vast humanitarian needs.

-with AAP