A Palestinian has been killed after a Jewish settlement guard opened fire at a group of men in an Arab neighbourhood of East Jerusalem.

Hours later, following the funeral of Samer Sarhan, the 32-year-old victim, Palestinian youths in the restive Silwan neighborhood confronted Israeli police, throwing rocks, setting three cars on fire and injuring at least seven passersby, police said.

Rock-throwing attacks soon spread to the Old City and other parts of East Jerusalem. At least five Palestinians were also injured, Palestinian authorities said.

Palestinian leaders accused the Israeli government of provoking the violence as an attempt to deflect blame over the current impasse in peace talks. The negotiations could collapse as early as Sunday due to a standoff over Israel's practice of building Jewish homes in the West Bank and parts of East Jerusalem.

"This violent escalation by the Israeli occupying forces represents destructive measures that defeat the peace-building agenda,'' said Palestinian Authority spokesman Ghassan Khatib. He blamed Wednesday's violence on Israel's policy to allow "heavily armed settlers in the heart of Palestinian neighborhoods."

Silwan, a crowded Arab neighbourhood of roughly 45,000 Arabs, is one of the most volatile areas of East Jerusalem, which Israel occupied in 1967 and later annexed in a move not recognised by the international community.