Outside the walled city, police threw stun grenades and fired rubber bullets to disperse protesters demanding that Israel return the bodies of several dozen Palestinians killed by Israeli forces.
Officers approached a man they said was following Jewish worshippers, and asked to see his papers, spokeswoman Luba Samri said.
Alleged stabbing incidents and auto rammings have killed 20 Israelis and a USA citizen. A nearby security guard apprehended the attacker who was then taken into police custody.
A wave of violence since the start of October has claimed the lives of 135 people on the Palestinian side, 19 Israelis, an American and an Eritrean.
One Palestinian witness, Suhail Hamed, 39, said the police opened fire when the auto was 150 metres (yards) away from them.
The Palestinian Authority charges the violence is the result of almost 50 years of Israeli occupation of the West Bank, east Jerusalem and Gaza Strip territories, home to more than five million Palestinians, and amid dim prospects of establishing a Palestinian state in these territories, in accordance with the two-state peace solution.
Israeli forces on Sunday shot dead 56-year-old Maher al-Jabi at the Huwwara military checkpoint after he ran his vehicle into soldiers, lightly injuring one. “The terrorist is under arrest”, a police statement said. At least 129 Palestinians have died in the same period, of whom 89 Israel says were attacking or attempting to attack Israelis.
On Friday Palestinians hold candles during a rally to pay tribute to Palestinians who organisers said were killed recently by Israeli troops, on Christmas day in Gaza City on Friday.
Israel blames the Palestinian attacks on incitement.
Also stoking the violence has been Muslim opposition to stepped-up Israeli access to Jerusalem’s al Aqsa mosque complex, which many Jews revere as a vestige of their biblical temples.