Micky Rosenfeld, a police spokesman, said the attack was "most likely a criminal attack and not a terror attack," while representatives of Tel Aviv's gay community said it was a homophobic attack.
Police are searching the area for the gunman, who fled the scene, Rosenfeld said.
Israel Channel 10 TV reported that the incident occurred at "Cafe Noir", a popular hangout frequented by the gay community in downtown Tel Aviv.
The station said that a man dressed in black entered the club and began shooting indiscriminately.
The report described the scene as a "bloodbath".
Police have ordered the temporary closure of all gay clubs in the Israeli city.
Soon after the incident, hundreds of Israelis held a rally in Tel Aviv in protest over the shooting, and candles were lit at the scene.
|Gay leaders say it is Israel's worst-ever hate crime against the community [AFP]
Nitzan Horowitz, Israel's only openly gay member of parliament, condemned the shooting as a "hate crime".
He called it "without a doubt the biggest ever attack on the Israeli gay community".
"We are all in shock," he said.
Coastal, cosmopolitan Tel Aviv has a bustling gay scene, but open homosexuality is less welcome in conservative areas of Israel.
Annual gay pride parades in Jerusalem often turn violent with protests instigated by ultra-Orthodox Jews.