A Jerusalem court ordered Sunday that a Palestinian American teenager, who was allegedly beaten in police custody, be released to house arrest for nine days pending an investigation into stone-throwing allegations.

Tariq Abu Khder, 15, who holds U.S. citizenship and lives in Florida, is a cousin of Mohammed Abu Khder, a 16-year-old Palestinian whose kidnap and murder by suspected Jewish extremists on Wednesday sparked four straight days of riots.

Israel on Sunday arrested a group of Jewish extremists in connection with the kidnap and murder of a Palestinian teenager who was burned to death in a suspected revenge killing.

The brutal murder of 16-year-old Mohammed Abu Khder on July 2 triggered four days of violent clashes which broke out in east Jerusalem and have spread to more than half a dozen Arab towns in Israel, with hordes of angry protesters hurling stones at riot police. 

Israeli troops opened fire on Sunday at a shepherd as he was herding his cattle in the South, reported the National News Agency.

It said that the soldiers fired five shots at Hussam Akasha in the Jabal Sadana heights, but they missed him.

Israeli Prime Minister Benjamin Netanyahu urged his cabinet on Sunday to keep a cool head about how to handle growing tensions in and around the Gaza Strip.

"Experience has proved that at moments like this, we have to act responsibly and with a cool head and not with harsh words and impetuousness," he told ministers, who are fiercely divided over how to respond to mounting militant rocket fire on southern Israel.

Clashes sparked by the abduction and murder of a Palestinian teenager spread from east Jerusalem to Arab towns inside Israel, as autopsy reports showed he was burned alive.

Rocket fire targeting Israel from Gaza also increased, raising fears of an escalation with the Islamist Hamas movement which controls the Palestinian enclave.

Gaza militants fired a new volley of rockets into Israel Saturday, clouding Egyptian efforts to broker a renewed truce, after protests over a Palestinian teenager's murder spread to Arab-Israeli towns.

Israeli police reported clashes in three mainly Arab towns in the northeast and centre late Friday after the east Jerusalem funeral of the teenager, believed to have been abducted and murdered by Jewish extremists.

Egypt was on Friday mediating a potential ceasefire between Israel and Hamas, which controls the Gaza Strip, after a flare-up of violence across the border.

"There are continuing Egyptian efforts to return calm to the Gaza Strip, but no agreement has been reached yet," a Hamas official told AFP, on condition of anonymity.

Thousands of Palestinians, some firing weapons into the air, took part Friday in the emotionally charged east Jerusalem funeral of a Palestinian teenager believed murdered by Israelis.

Chanting "with our blood and our spirit we shall sacrifice for the martyr," mourners carried the shrouded body of Mohammed Abu Khder, 16, through his neighborhood of Shuafat as flag-waving crowds thronged the narrow streets.

The International Monetary Fund on Thursday said the economy in the West Bank and Gaza is weakening and urged Israel to lift restrictions on the Palestinians.

After briefing the international donor community and the Palestinian Authority, IMF mission chief Christoph Duenwald said in a statement that the authority is "doing a commendable job" managing the economy in difficult circumstances.

U.S. President Barack Obama's former Middle East peace envoy Martin Indyk says "distrust" between Israeli and Palestinian leaders is at the heart of their impasse.

"It's the distrust between the leaders and between the people that holds us up and makes it difficult," the veteran diplomat told the New York Times in an interview published Thursday, his first since leaving the post last week after peace talks collapsed.