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

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

Palestinian officials said the killing of Samir Serhan, 32, a 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, a spokesman for Israel's Construction & Housing Ministry.

Micky Rosenfeld, an Isaeli police spokesman, said Mr. Serhan had been detained in the past for "participation in unrest."

Silwan, a crowded neighbourhood where a few dozen Jewish families live in a guarded enclave surrounded by 12,000 Arab residents, is one of the most volatile areas of east Jerusalem, which Israel occupied in 1967 and later annexed in a move not recognized by the international community.

The neighbourhood is just outside the walls of the Old City and the mosque compound, which is the holiest site for Jews because it was the location of the Second Jewish Temple, torched by the Romans in 70 AD.

Rioters took to the streets after the killing, overturning two cars, burning two others and throwing rocks at police and passersby. Police responded with tear gas, water cannon and stun grenades.

At least 11 Israeli civilians and a policeman were hurt. Two Palestinians were wounded in the initial shooting and more in later confrontations.

Palestinian youths, their faces covered, smashed cars with wooden clubs before burning them.

Later in the day, hundreds of mourners attended the funeral of Mr. Serhan, who had five children.

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. Palestinians say they will quit the talks if Israel does not extend the freeze.

Ghassan Khatib, a Palestinian government spokesman, said the latest violence was evidence of Israeli poor faith. "This violent escalation by the Israeli occupying forces represents destructive measures that defeat the peace-building agenda," he 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."

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