An Israeli security guard killed a Palestinian in an Arab neighbourhood of Jerusalem on Wednesday, triggering clashes between police and rioters, including in the compound of the al-Aqsa mosque.

Police said they entered the plaza to push back Palestinians who had thrown rocks at the nearby Jewish prayer site, the Western Wall.

The Palestinians withdrew into the mosque, Islam's third-holiest shrine, and there were no immediate reports of casualties or further confrontations, a spokesman said.

Palestinian officials said the killing of a 32-year-old resident of East Jerusalem and the police response had undermined sensitive U.S.-sponsored peace negotiations. Israeli authorities said the guard, who provided government-funded protection for a small Jewish settlement in the Silwan district, opened fire on dozens of Palestinians who had blocked and stoned his car before dawn.

"It was his life or theirs," said Ariel Rosenberg, spokesman for Israel's Construction and Housing Ministry.

Silwan residents took to the streets after the incident, overturning two cars, burning two others and throwing rocks at police and passersby. Police said they responded with teargas, water cannon and stun grenades.

TROUBLES WITH PEACE TALK

At least 11 Israeli civilians and a policeman were hurt in the clashes, police said. Silwan residents said two Palestinians were wounded in the initial shooting and more in later confrontations, but exact figures were not available.

At least one police vehicle was set ablaze and a few public buses were seriously damaged by rioters.

Reuters TV images showed Palestinian youths, their faces covered, smashing cars with wooden clubs before burning them and police on horseback arriving on the scene.

Hundreds of mourners attended the funeral of the dead man, who had 5 children, and confrontations spread to the nearby Old City, where the al-Aqsa mosque abuts the Western Wall.

The flare-up came as peace talks between Israeli and Palestinians faced a crisis over the issue of Jewish settlements in the occupied West Bank and east Jerusalem.

A partial Israeli moratorium on settlement building expires on Sunday and Palestinians say they will quit the talks if Israel does not extend the freeze.

Palestinian government spokesman Ghassan Khatib said Wednesday's violence was evidence of Israeli poor faith.

"This violent escalation by the Israeli occupying forces represents destructive measures that defeat the peace building agenda," Khatib said.

"These illegal actions of continuing to place heavily armed settlers in the heart of Palestinian neighbourhoods, result in daily provocations and violence against defenceless and unarmed Palestinians and paves the way for such crimes to continue."

Israel captured East Jerusalem and the West Bank from Jordan in the 1967 Middle East war and regards the whole city as its capital -- a status not recognised internationally. Many settlers claim a Jewish biblical birthright to the region.

Palestinians want East Jerusalem as the capital of the state they intend to establish in the West Bank and Gaza Strip.

Palestinians torched cars and threw stones and firebombs at Israeli police in Silwan last month after residents reported that settlers had tried to cross a mosque courtyard to reach an ancient spring where religious Jews conduct ritual ablutions.