Israeli police have launched a manhunt after an apparent arson attack, accompanied by Hebrew-language graffiti, on a mosque in occupied East Jerusalem.

"Police were summoned to a mosque in Beit Safafa, in Jerusalem, following a report of arson in one of the building's rooms and spraying of graffiti on a nearby wall outside the building," a police statement said on Friday.

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Nobody was injured in the incident, police said. There was damage to an interior prayer room, but the structure was unharmed.

"A wide-scale search is taking place in Jerusalem," police spokesman Micky Rosenfeld told AFP news agency.

"We believe that the incident took place overnight. We are searching for suspects."

The spokesman would not say if police viewed it as a hate crime.

The graffiti, seen by an AFP journalist, contained the name Kumi Ori, a small settlement outpost in the north of the Israeli-occupied West Bank.

One part read, "Demolishing (for) Jews? Demolishing enemies!", an apparent reference to the dismantling of settler outposts in the West Bank.

'Price tag' attack

Israel captured and occupied East Jerusalem along with the West Bank in the 1967 Middle East war. The Palestinians want both areas as part of their future state.

All settlements on occupied Palestinian land are considered illegal under international law, but Israel distinguishes between those it has approved and those it has not.

Israeli Arab legislator Osama Saadi told AFP news agency that Friday's incident had the appearance of a "price tag" attack, a euphemism for Jewish nationalist-motivated hate crimes that generally target Palestinian property in revenge for attacks against Israelis or Israeli government moves against unauthorised outposts like Kumi Ori.

"The settlers didn't only write words, they also burnt the place and they burnt a Koran," said Saadi, who lives in the area.

In December, more than 160 cars were vandalised in the Shuafaat neighbourhood of East Jerusalem with anti-Arab slogans scrawled nearby.

The slogans read "Arabs=enemies", "There is no room in the country for enemies" and "When Jews are stabbed we aren't silent".

The attackers were described by a local resident as "masked settlers".