Thousands marched through the occupied West Bank in a funeral Wednesday for a Palestinian boy who was shot dead by Israeli forces during a protest against Israel's separation barrier.

"Oh martyr, rest in peace, we shall continue the struggle," the crowd of some 3,000 people chanted during the march from the city of Ramallah to the nearby village of Nilin where 12-year-old Ahmed Mussa was killed on Tuesday.

Clashes broke out when the procession reached the village, with Palestinians hurling stones and Israeli troops firing tear gas grenades and rubber bullets, wounding five Palestinians, medics said.

Doctors at a nearby hospital said one of the wounded, a 16-year-old, was in serious condition after being shot in the eye and the head with rubber-coated bullets.

Earlier Mussa's extended family had gathered in his family home as neighbours and relatives milled outside the house chanting, "Ululate with joy, mother of the martyr, your son is surely in paradise!"

His parents huddled inside, his mother silently hugging a picture of her son and his father holding back tears. "God gave me my son Ahmed, and he took him as a martyr," he said. "I only ask that God is merciful to him."

Rafik Husseini, an aide to Palestinian president Mahmud Abbas who attended the funeral, said the shooting was "truly a crime against a child."

"The Israeli army, with its actions in Nilin and the rest of the West Bank, is trying to destroy any chance of peace and of a solution with two states living side-by-side," he said.

An Israeli soldier shot the boy in the head with a live round during a demonstration in Nilin, according to protest organisers and witnesses.

Salah Khawaja who organises weekly protests in the village against a nearby section of the separation barrier, said soldiers fired live rounds towards a group of protestors who had run into Nilin after dispersing them outside the village with rubber-coated bullets.

Ahmed Saadat, a 10-year-old boy who saw the shooting, said he was with a group of children near a section of the barbed wire fence on the edge of the village that had been cut by older boys earlier in the day.

Saadat said they threw rocks at soldiers who arrived in a military jeep.

"A military jeep came, and a soldier wearing a uniform got out and fired at us. He hit Ahmed directly in the head," Saadat said.

Mahmud Mohsen, another 10-year-old, said Mussa tried to run away but his sandal slipped off after he stumbled over a part of the fence.

Israeli police are investigating the incident.

"A police investigation is under way into the unfortunate incident that led to the death of a 12-year-old child," police spokesman Micky Rosenfeld told AFP, adding that every soldier present was questioned immediately afterwards.

Villagers and activists regularly protest at Nilin against the construction of the separation barrier, hurling rocks at construction workers and Israeli troops, who usually respond with tear gas and rubber-coated bullets.

Israel says the the projected 723 kilometres (454 miles) of steel and concrete walls, fences and barbed wire is needed for security, while Palestinians view it as a land grab that undermines their future state.

To date Israel has built 57 percent of the projected barrier, most of it in the West Bank.

The International Court of Justice issued a non-binding resolution in 2004 calling for parts of the barrier inside the West Bank to be torn down and for a halt to construction there.

Israel has ignored the ruling, as well as a similar order by its own High Court that nullified three sections of the wall, including one that runs near Bilin, a town near Nilin that has held weekly protests for more than two years.