Islamic Jihad claimed responsibility for the bombing, saying it was avenging Israel's killing of a top West Bank commander on Monday.
"It's like a war zone here," one witness, Idan Akiva, said after the blast at the popular outdoor market where pools of blood mixed on the pavement with smashed produce and shattered debris.
Israel has been on edge amid the latest flare-up of violence in and around the Gaza Strip, one of the worst since an Israeli withdrawal from the coastal territory on September 12 after 38 years of occupation.
Israeli warplanes and artillery pounded an area of northern Gaza early on Wednesday in response to militants firing a rocket into southern Israel. No casualties were reported.
Hours later, a bomber blew up in front of a sandwich stand in the main market in Hadera, a frequent target of attacks in a 5-year-old Palestinian uprising. At least five people were killed and 30 wounded, emergency officials said.
It was the first bombing inside the Jewish state since August 28, when a suicide bomber struck at the entrance to Beersheba's central bus station, wounding 20.
Israeli Foreign Ministry spokesman Mark Regev said Wednesday's attack represented "violent language transformed into violent action", referring to recent militant threats against Israel.
"We condemn this attack," said Palestinian chief negotiator Saeb Erekat. "We urge all to understand that violence will only breed violence and we don't want to go back to this vicious cycle."
Khader Habib, an Islamic Jihad leader in Gaza, called the Hadera bombing "a natural reaction to the crimes of the occupation".
Israel, which said Assadi had been planning new attacks, has said it reserves the right to strike at "ticking bombs" despite the truce. Islamic Jihad had killed 10 Israelis in two other bombings since the truce was declared in February.
After a lull for much of Tuesday, militants fired two rockets at Israel from Beit Hanoun in northern Gaza early on Wednesday, witnesses said.
The al-Aqsa Martyrs Brigades, an armed wing of Palestinian President Mahmoud Abbas's ruling Fatah movement, claimed responsibility for the rocket attack. Abbas had condemned earlier rocket attacks by militants.