Israeli police have shot dead a Palestinian after he drove a vehicle into a group of people in Jerusalem, killing a baby and wounding eight others, Palestinian news agency SAFA reported.

The incident took place in the Sheikh Jarrah neighborhood of East Jerusalem on Wednesday.

Israel's Channel 7 said the three-month-old girl died of severe injuries, while the others were being treated in hospital.

According to Israeli media reports, Abdel-Rahman Shaloudi, 21, drove his vehicle into the crowd as they exited a train and then attempted to flee on foot.

The US State Department said the baby was "reportedly an American citizen," but did not provide further information.

Sources told SAFA that Shaloudi, a resident of Silwan in Arab East Jerusalem, was released in December 2013 after spending 16 months in jail on charges of "disturbing internal security."

Shaloudi is the nephew of Mohieddin Al-Sharif, the former leader of Hamas' military wing, the Ezzeddin Al-Qassam Brigades, who died in 1998.

"This is how [Palestinian President] Abu Mazen's partners in government act," Israeli Prime Minister Benjamin Netanyahu said on his official Facebook page, referring to Hamas.

The same sources added that Shaloudi was re-arrested a few months after his release and spent three weeks in an Israeli prison. During his arrest, Israeli troops physically assaulted his mother and grandmother and arrested his father.

After Wednesday's incident, Israeli forces stormed Shaloudi's home in Silwan, questioned local people, confiscated computers and arrested his 15-year old brother, Ezzedine.

The East Jerusalem district of Silwan is a flashpoint for confrontations, due to its proximity to the Dome of the Rock, a shrine that contains the holiest site in Judaism and one of the most important in Islam.

The compound – which is protected by Israeli police – is frequently stormed by Jewish settlers.

On Monday, groups of Israeli Jewish settlers occupied two residential buildings in Silwan, expanding a Jewish settler project in defiance of US criticism.

In late September, Jewish settlers occupied 25 other houses in Silwan and forcibly expelled the residents of an apartment.

The incident led to clashes between Palestinian residents and settlers in the district.

The international community considers the West Bank and East Jerusalem as Palestinian territories occupied by Israel in 1967. The occupation forces later annexed East Jerusalem in a move never recognised by the international community. All Jewish settlement buildings are viewed as illegitimate.

Palestinian Prime Minister Rami Hamdallah on Wednesday visited a mosque in Nablus which was set alight and vandalised by settlers a day earlier, according to Palestinian news agency Ma'an.

The prime minister said the attack was "terrorism" and that Israel allows settlers to kill, burn agricultural land, assault Palestinians and attack religious sites with impunity.

"Israel violates international law and human rights every single day with its racist actions, occupation, settlers and the wall," the prime minister added.

Israeli and Palestinian negotiators are due to resume talks on a durable Gaza ceasefire next week in Cairo. In August, Egypt sponsored a ceasefire to end Israel's 50-day offensive on the coastal enclave.

Around 20,000 homes in Gaza were destroyed or severely damaged in the recent offensive. More than 100,000 people are still displaced, with about 57,000 living in communal shelters.

The Gaza Strip has been subjected to three wars in the past six years. They have claimed 3,760 lives – 2,145 of which were in the latest offensive. Over 18,000 people have been injured.