TEL AVIV (AFP) - Israeli security forces pressed a manhunt Saturday for the Arab Israeli suspected of killing two people and wounding seven others at a Tel Aviv pub, with the motive still unknown.

The New Year's Day shooting came amid a wave of Palestinian attacks on Israelis and days after the leader of the Islamic State in Iraq and Syria (ISIS) group threatened the Jewish state with violence.

Police partially lifted a gag order on Saturday, naming the suspected shooter as Nashaat Melhem, 31, from the Arab village of Arara in northern Israel. They distributed his picture and encouraged public vigilance, as a massive manhunt continued.

Police spokesman Micky Rosenfeld said there was a "strong possibility that this was a terrorist attack but we haven't ruled out criminal motives".

Prime Minister Benjamin Netanyahu took a cautious tone in Saturday evening remarks at the site of the shooting, refraining from defining it as anything beyond a murder.

"There was a despicable murder here yesterday - incomprehensible cruelty," he said after lighting a candle outside the pub.

"Young people, whose entire lives were ahead of them, the ages of my own children, were innocently sitting celebrating a birthday and were murdered in cold blood."

Netanyahu noted that security forces were working "around the clock to apprehend the murderer."

The shooting has been condemned by the council of Arara, the suspect's hometown, which as well as by the head of the Joint List, which groups the main Arab parties in parliament.

The premier praised "the condemnations of the crime from the Arab sector," while stressing he expected to hear such from "all Arab members of parliament."

He noted the existence of Arab Israeli "enclaves in which there is no law enforcement and in which there is Islamist incitement, rampant crime and illegal weapons that are frequently fired at events such as weddings."

He said he had formulated a plan to dramatically increase law enforcement in the Arab sector.

"You can't say 'I'm an Israeli in my rights and a Palestinian in my duties' - whoever wants to be an Israeli has to be one all the way, in rights and duties, and the first duty is to obey the country's law," he stressed.

Arab Israelis are those who remained in the Jewish state after its 1948 creation, as well as their descendants. They account for more than 17 per cent of the country's population.

They often complain of discrimination in various fields, including building permits, infrastructure and education.

Members of his family told media Melhem had been suffering mental issues, and had been imprisoned for attacking an Israeli soldier in what he said was an attempt at revenge over the death of a relative shot by police in 2006.

Security camera footage from a nearby store showed a bespectacled young man with a backpack calmly pretending to shop before going to the exit, placing the backpack on a trolley, removing what looked like a submachine gun and opening fire in the street.

One of those killed was identified by his father as Alon Bakal, a law and business student who was a manager at Simta, the pub that was targeted.

Police named the second fatality as Shimon Ruimi from southern Israel.

They issued a gag order on the investigation, as well as the one into the death of an Arab Israeli taxi driver found shot in north Tel Aviv a short while after the shooting rampage.

They have refused to say whether the attacks were linked.

In a recording released a week ago and attributed to Abu Bakr al-Baghdadi, the secretive IS leader pledged to attack Israel.

Baghdadi said ISIS has "not forgotten Palestine for a single moment".

"And soon, soon with God's permission, you will hear the footsteps of the mujahedeen... We are getting closer to you day by day," he said.

Meanwhile, in a wave of Palestinian attacks since Oct 1 - including stabbings, car-rammings and gunfire targeting security forces and civilians - 22 Israelis, an American and an Eritrean have been killed.

At the same time, according to an AFP count, 138 Palestinians have been killed by Israeli forces, most while carrying out attacks on Israelis.