Clashes and demonstrations took place across Israel Sunday as police raised alert levels nationwide amid a wave of anger over the deadly shooting of a young Arab-Israeli.

With shops, schools and business shuttered as Arab towns and villages observed a general strike, police raised the alert to one below the highest level and deployed in areas of friction, spokeswoman Luba Samri said.

Israeli Environment Minister Amir Peretz said Sunday he is resigning over Prime Minister Benjamin Netanyahu's social policies, in a potentially major blow to the stability of the coalition government.

Speaking at the weekly cabinet meeting, Peretz said the state was undergoing "an earthquake in all fields -- diplomatic, social and financial," and accused Netanyahu of acting irresponsibly, a statement from his spokeswoman said.

When he died, Yasser Arafat, arguably still the most recognizable face of the Palestinian cause, had been largely dismissed by the United States as an obstacle to peace after walking away from a deal with Israel.

Yet 10 years on and despite an intensive U.S.-brokered diplomatic drive, an end to the decades-long Israeli-Palestinian conflict remains as elusive as ever.

In Jalazun refugee camp, Yasser Arafat's image is everywhere. From the giant portrait in Arafat Square to the walls of every family home, pictures of the man who embodied the Palestinian struggle are jealously guarded.

"Arafat is the father of the Palestinian cause: he lifted up the name Palestine and the rights of the refugees," said 90-year-old Ahmed Massud who fled his home during the Nakba, or catastrophe, that befell the Palestinians when Israel was established in 1948.

For most Israelis, the late Yasser Arafat and his trademark black-and-white keffiyeh represents the embodiment of the "arch-terrorist".

But a minority in Israel look back fondly on the former Palestinian leader -- who died 10 years ago this week -- as the man who dared to sign an peace accord with the Jewish state.

The European Union's top diplomat Federica Mogherini said on Saturday that Jerusalem "should be the capital of two states," as tensions gripped the holy city hit by Israeli-Palestinian violence.

"I think Jerusalem can be and should be the capital of two states," Mogherini told reporters in the Israeli-occupied West Bank city of Ramallah, touching on a sensitive issue that has blocked peace efforts for decades.

Police shot dead a young Arab-Israeli during an attempted arrest Saturday, threatening to inflame Palestinian anger as the top EU diplomat pushed for progress on the political front.

The dawn killing in Kfar Kana in northern Israel comes against a backdrop of soaring Israeli-Palestinian tensions in annexed east Jerusalem where there have been near-daily clashes in flashpoint neighbourhoods.

The head of Jordan's Muslim Brotherhood called Friday on the government to scrap its peace treaty with Israel after clashes between Israeli police and Palestinians at Jerusalem's flashpoint Al-Aqsa mosque.

At a rally in Amman attended by hundreds of supporters, Hammam Saeed said the government's decision to recall its ambassador in protest at ongoing altercations around Al-Aqsa did not go far enough.

Stone-throwing Palestinians battled Israeli police in a refugee camp in east Jerusalem Friday as the top EU diplomat warned of a new wave of violence if peace efforts remain deadlocked.

Clashes shook the Shuafat camp for a third straight day with security forces firing tear gas at crowds of youths who set light to tires and rubbish bins.

An Israeli man who was critically wounded in a deadly Palestinian car attack in Jerusalem died of his injuries early Friday, raising the death toll to two, the hospital said.

"The person who was critically wounded in the hit-and-run attack in Jerusalem passed away this morning," said a statement from Hadassa hospital in Ein Kerem.