The 23-year-old from the West Bank city of Tulkarem was being questioned, police spokesman Micky Rosenfeld said. Officials say he entered Israel illegally.
Four were seriously injured, three moderately and two lightly, according to first aid.
Witnesses said the suspect first began stabbing the driver as soon as he boarded the line 40 bus during the morning rush hour. The driver, who used pepper spray in a bid to overpower the attacker, suffered wounds to his chest and abdomen.
An 8th-grade student who was on his way to school, and was injured in the arm, said he threw his bag at the attacker.
“I saw him stabbing the driver, so I ran to the back (of the bus) to escape from him with the other people,” Liel Suissa told reporters. “And afterwards when we were outside he chased after us with the knife still in his hand.”
The security official who shot him in the leg was a prison service officer who happened to be passing by, witnesses said.
Palestinian Islamist movement Hamas praised the assailant as a hero, but did not claim responsibility.
Senior Hamas leader Izzat Risheq called the stabbing spree a “brave and heroic operation” and “a natural response to the crimes and terrorism of the Israeli occupation against our people.”
Palestinian security sources identified the attacker as Hamza Muhammad Hasan Matrouk. Tulkarem camp locals told the Ma’an news agency that Hamza was not affiliated to any political faction.
Israeli Prime Minister Benjamin Netanyahu placed indirect responsibility on Palestinian President Mahmoud Abbas, charging the act was a “direct result of the venomous incitement spead by the Palestinian Authority against the Jews and their state.”
He criticized Hamas for welcoming the stabbing of civilians, saying this was the “same Hamas which has announced it will prosecute Israel at the International Criminal Court in the Hague.”
Israel has also witnessed unrest this week among the Arab minority, who make up about 20 per cent of its citizens.
Two Bedouins in the south of the country died in confrontations with Israeli police, sparking protests and prompting the Arab leadership in the country to call for a one-day general strike Tuesday.
Israel heads to elections in March, with Netanyahu, of the right-wing nationalist ruling Likud, facing competition from parties to his right and a coalition from the centre-left. In the past, Palestinian attacks have pushed Israeli voters to the right.
Foreign Minister Avigdor Lieberman, of the ultra-nationalist Israel Beiteinu faction, blamed Abbas and other local Arab leaders in Israel, who have organized protests.
Economy Minister Naftali Bennett, of the pro-settler Jewish Home, called Abbas a “terrorist.”
“We will not accept a situation in which Israeli citizens cannot travel safely in public transportation,” said Isaac Herzog, of the dovish Labour Party, which has renamed itself the Zionist camp after uniting with a list headed by centrist former chief Israeli negotiator Tzipi Livni.