Scalar atomic magnetometers have many attractive features but their sensitivity has been relatively poor. We describe a Rb scalar gradiometer using two multi-pass optical cells. We use a pump-probe measurement scheme to suppress spin-exchange relaxation and two probe pulses to find the spin precession zero crossing times with a resolution of 1 psec. We realize magnetic field sensitivity of 0.54 fT/Hz 1/2 , which improves by an order of magnitude the best scalar magnetometer sensitivity and surpasses the quantum limit set by spin-exchange collisions for a scalar magnetometer with the same measurement volume operating in a continuous regime. PACS numbers: 07.55.Ge, 42.50.Lc, 32.30.Dx Alkali-metal magnetometers can surpass SQUIDs as the most sensitive detectors of magnetic field, reaching sensitivity below 1 fT/Hz 1/2 [1, 2], but only if they are operated near zero magnetic field to eliminate spin relaxation due to spin-exchange collisions [3,4]. Many magnetometer applications, such as searches for permanent electric dipole moments [5], detection of NMR signals [6], and low-field magnetic resonance imaging [7], require sensitive magnetic measurements in a finite magnetic field. In addition, scalar magnetometers measuring the Zeeman frequency are unique among magnetic sensors in being insensitive to the direction of the field, making them particularly suitable for geomagnetic mapping [8] and field measurements in space [9,10]. The sensitivity of scalar magnetometers has been relatively poor, as summarized recently in [11]. The best directly measured scalar magnetometer sensitivity is equal 7 fT/Hz 1/2 with a measurement volume of 1.5 cm 3 [12], while estimates of fundamental sensitivity per unit measurement volume for various types of scalar alkali-metal magnetometers range from several fT cm 3/2 /Hz 1/2 [13, 14] to about 1 fT cm 3/2 /Hz 1/2 [12]. Here we describe a new type of scalar atomic magnetometer using multi-pass vapor cells [15,16] and operating in a pulsed pump-probe mode [17] to achieve magnetic field sensitivity of 0.54 fT/Hz 1/2 with a measurement volume of 0.66 cm 3 in each multi-pass cell. The magnetometer sensitivity approaches, for the first time, the fundamental limit set by Rb-Rb collisions. We also develop here a quantitative method to analyze significant effects of atomic diffusion on the spectrum of the spin-projection noise in vapor cells with buffer gas using a spin time-correlation function.The sensitivity of an atomic magnetometer, as any other frequency measurement, is fundamentally limited by spin projection noise and spin relaxation [18]. For N spin-1/2 atoms with coherence time T 2 the sensitivity after a long measurement time t ≫ T 2 is given by δB = 2e/N T 2 t/γ, where γ is the gyromagnetic ratio. Spin squeezing techniques can reduce this uncertainty by a factor of √ e, but do not change the scaling with N [18-20]. The number of atoms can be increased until collisions between them start to limit T 2 . Writing T −1 2 = nσv, where n is the density of atoms, σ is the spin relaxation c...