The European Union's new foreign affairs chief has called for the establishment of a Palestinian state, saying the world "cannot afford" another war in Gaza.

"We need a Palestinian state - that is the ultimate goal and this is the position of all the European Union," Federica Mogherini said on Saturday during a visit to the besieged territory.

Her statement came against a backdrop of soaring Israeli-Palestinian tensions in occupied East Jerusalem, where there have been near-daily clashes in flashpoint neighbourhoods in recent weeks.

Tensions were heightened on Wednesday by an Israeli raid on the Al-Aqsa Mosque, one of the holiest sites of Islam.

Israel deployed more than 1,300 police across occupied East Jerusalem on Friday to prevent further violence.

Palestinian killed

Israeli police said they started investigating the fatal shooting of a 22-year-old Palestinian on Saturday, after video footage emerged showing the man was shot as he retreated from police, and was not threatening the officers with a knife as was claimed.

Israeli securty forces shot the young Palestinian man during an alleged confrontation, triggered by the attempted arrest of a relative near Nazareth. Israeli police from Nazareth station claimed in a statement that the shot man intervened in the arrest of one of his relatives, threatening the officers with a knife.

Police said warning shots were first fired before he was shot at to die on the way to hospital.

A video showed a police officer shooting a man at a close range, after he approached the car. After the shooting, the video showed the police dragging the man to the car instead of treating him on the scene, and calling an ambulance.

Reports later said the man on the video was Hamdan, who died in the hospital after he was hit in his upper body.

Thousands of angry youths set up barricades, torched tyres on the outskirts of the village of Kfar Kana and hurled rocks at the police in anger following the killing of Kheir Hamdan. Security forces dispersed the crowds and sent reinforcements after news of the death broke.

Since Israel's war on Gaza over the summer, hundreds of Palestinians living in Israel have been arrested by the police.

Palestinians who live inside Israel account for about 20 percent of Israel's population.