Israeli police sealed off the scene of the attack
The blast happened near a food stand in the town's busy market place.
The Palestinian Islamic Jihad group said it carried out the attack in revenge for Israel's killing of its senior leader, Luay Saadi, on Monday.
Early on Thursday, Israel launched air strikes on Gaza, but no casualties were reported.
The third successive day of air raids came after Defence Minister Shaul Mofaz ordered a military operation against Palestinian militants in the Gaza Strip and the West Bank.
Wednesday's attack in Hadera was the first bomb attack in Israel since 28 August, when a suicide bomber blew himself up at the entrance to Beersheba's central bus station wounding 20 people.
Palestinian leader Mahmoud Abbas condemned the attack, saying "it is against our interests and it only increases the violence in this region."
The US described the bombing as "a heinous attack on innocent civilians", stressing that the Palestinian Authority needed "to do more to end the violence and prevent terrorist attacks".
'Looks like a war'
Police said a suicide bomber walked into the market in Hadera, detonating his explosives at a falafel stand near the town's central bus station at around 1600 (1400GMT).
Ambulances rushed to the scene to treat the wounded, as security forces sealed off the town, Israeli media reports.
There have been some steps taken but we really need to see a serious disarming of these extremist groups
Mark Regev
Israeli spokesman
In pictures: Hadera attack
Israeli ambulance official Chaim Rafalowski told the BBC the market would have been busy with people stocking up on supplies, on the first working day following a two-day holiday.
Eidan Akiva, who lives near the site of the blast, told Israeli TV that body parts were strewn across the street next to his apartment building. The damage was immense, he added.
"All the stalls alongside just fell apart. The windows are all broken. It looks like a war was here," he told Channel Ten.
National police spokesman Mickey Rosenfeld told French news agency AFP that five Israelis as well as the suicide bomber had been killed, and 26 were wounded.
Some of the wounded were treated at a nearby playing field, while others were being evacuated to local hospitals.
At least one person was in critical condition, six people were said to be in serious condition and another four had sustained moderate wounds, Israel's Haaretz newspaper reported.
'Natural retaliation'
Mr Abbas vowed that the Palestinian Authority would "increase its efforts to ensure the continuation of the truce because it is in the interest of both the Palestinian and the Israeli peoples."
But the Israeli government blamed the attack on the Palestinian Authority's failure to crack down on militants.
Israeli foreign ministry spokesman Mark Regev said Mr Abbas "says the right thing... But if we have a criticism it's that he talks the right talk, we're waiting for him to follow through on these commitments.
"Now there have been some steps taken but we really need to see a serious disarming of these extremist groups."
Palestinian militant groups agreed to a ceasefire in February, and there has been relative calm since Israel withdrew from the Gaza Strip in August.
But Islamic Jihad spokesman Khader Habib told the AP Wednesday's attack was a "natural retaliation" for the Israeli attack on Luay Saadi in the West Bank on Monday.
"The Islamic Jihad movement was committed to the truce, and is still committed to the truce, but this truce should be mutual. We cannot tolerate a one-sided truce," he said.
Map of Israel with Hadera
Israeli police confirmed that a suicide bomber was responsible for a blast that killed five people and left many seriously injured. The Wednesday afternoon attack occurred in an open market place in the small costal Israeli town of Hadera, a location which has been a frequent target of attacks in the five-year-old Palestinian uprising.

The market place was busy with shoppers in advance of a Jewish Holiday, with many stocking up for the weekend. 

''CNN'' reporters on the scene say 20 have been injured, 6 are critical, 7 are serious, and the death toll is expected to rise. Television pictures are showing a scene of absolute devastation and confusion.

Islamic Jihad of Gaza has claimed responsibility, which was in response to an Israeli killing of Islamic Jihad commander Luay Saadi in the West Bank on Monday, prompting armed groups to take revenge. In an interview with Ynet news, Abu-Muaman the Organization's leader stated ... "This attack is merely a preliminary response by the Palestinian rebellious groups, and harder retaliation is on its way."

Saeb Erekat, a Palestinian negotiator, denounced the attack and said that he hoped the peace between the two sides would not be damaged.

Dr Ra'anan Gissin spokesperson for the Israeli PM, speaking on ''CNN'' is refuting claims that this is a revenge attack, claiming "that this is just another terrorist attack in the Palestinians' plan to rid the Middle East of Israeli."

Khader Habib, a spokesperson for the Islamic Jihad said that ... "The Islamic Jihad movement was committed to the truce, and is still committed to the truce, but this truce should be mutual. We cannot tolerate a one-sided truce."

The recently elected Iranian President Mahmud Ahmadinejad called for Israel to be "eradicated from the map" and condoned the recent wave of Palestinian attacks in his speech today during a conference in Teheran titled "The World without Zionism."
Mahmoud Abbas has stated that the Palestinian Authority would "increase its efforts to ensure the continuation of the truce because it is in the interest of both the Palestinian and the Israeli peoples."

Mark Regev, a spokesperson for the Israeli foreign minsitry responded that "Abbas says the right thing... But if we have a criticism it's that he talks the right talk, we're waiting for him to follow through on these commitments. Now there have been some steps taken but we really need to see a serious disarming of these extremist groups."