Updated

A Palestinian gunman opened fire on Israeli police officers just outside the walled Old City of Jerusalem on Tuesday, wounding one, and a passer-by was killed in the ensuing gunbattle, police said.

The shooting came after a Palestinian militant died in the West Bank, apparently as a result of a clash with Israeli troops, and just before a second round of high-level meetings between Israeli and Palestinian officials aimed at easing tensions after 21 months of violent conflict.

The Jerusalem shooting occurred when a policeman spotted a Palestinian man who looked suspicious close to Herod's Gate, which leads into the Old City, and tried to check him, police spokesman Kobi Zrihen said.

The gunman drew a pistol and shot the policeman. The wounded police officer was in moderate to serious condition, said Yael Bossem-Levy, spokeswoman for the Hadassah Hospital at Ein Karem.

The passer-by, whom police described as an Arab, was shot and killed in the fire. Earlier police said it was the gunman's fire that killed the passer-by, but police then said they weren't sure since officers also fired shots, trying to stop the fleeing gunman. A man's body, covered in black plastic, was seen under a tree.

Police erected road barricades, vacated the area and launched a search for the gunman, and a suspect was arrested about an hour later.

The shooting occurred in the eastern section of the city, an area dominated by Arabs and normally bustling with people shopping in local markets.

Samir Abbed Rabbo, a U.S. citizen from Clifton, N.J., said he saw the gunman pull out a pistol from his jacket and fire at the officer.

"I thought it was a plastic gun," Abbed Rabbo said. "I tried to call him to say 'What the [expletive] are you doing?' He threw his gun away and all of a sudden there were about 20 policemen shooting all over the place."

In the West Bank shooting, a Palestinian gunman bled to death before he made it to the hospital, the militant group Islamic Jihad said. The group said Moamar Daraghmeh was armed and on a mission against Israeli targets when he set off from Yamoun village in the West Bank.

Daraghmeh, 30, was brought to a hospital in nearby Jenin but he had already bled to death, said Haitham Abu Moudis, a nurse from the Palestinian Red Crescent.

The army said it was investigating the shooting.

Since back-to-back suicide bombings two weeks ago killed 27 Israeli citizens, most villages and towns in the West Bank have been effectively occupied and locked under curfew. The Islamic Jihad has killed scores of people in suicide bombings inside Israel.

In Jerusalem, meanwhile, Israeli police closed the Palestinian Al-Quds University president's office by order of Public Security Minister Uzi Landau.

Israel suspects top university officials of secretly operating on behalf of the Palestinian Authority, and the closure order cited agreements forbidding Authority activity in Jerusalem. Israel says it says has no standing in the city.

The Palestinians wish to establish their capital in east Jerusalem, which Israeli occupied in the 1967 Mideast war. Israel has long held that the entire city should be under Israeli rule only, but in abortive peace negotiations two years ago Ehud Barak's government offered to share it with the Palestinians.

Sari Nusseibeh, the university president, was in Greece during Tuesday's raid. Nusseibeh, who is also the Palestinian Liberation Organization's top representative in Jerusalem, is seen by Israel as one of the more moderate Palestinian figures, and the raid on his headquarters was somewhat unexpected.

Last year, police closed the Orient House compound which had been used by Faisal Husseini, Nusseibeh's predecessor in the PLO post.

Israeli Foreign Minister Shimon Peres was expected to hold more meetings with Palestinian Cabinet ministers after an icebreaking session Monday in Jerusalem, where the two sides discussed ways to ease the economic plight of the Palestinian population caused by the Israeli blockade of Palestinian cities in the West Bank.

A Palestinian official, speaking on condition of anonymity, said Peres was meeting with Palestinian Interior Minister Abdel Razak Yihiyeh on Tuesday.

The sudden renewal of Israeli-Palestinian talks was a prelude to a meeting next week in New York of officials from the United Nations, United States, European Union and Russia, leading efforts to end the 21-month-old Palestinian-Israeli conflict.

The meeting starts July 15 with U.N. Secretary-General Kofi Annan, Secretary of State Colin Powell, and senior EU and Russian officials. They will be joined the following day by officials from Saudi Arabia, Egypt and Jordan.

On Monday, Peres met the new Palestinian Finance Minister Salam Fayed in Jerusalem. It was the first face-to-face talks at that level for months. Political contacts were broken off on the background of the violence between the two sides.

The Peres-Fayed meeting took place during one of the longest stretches without an Israeli fatality since fighting broke out between Israel and the Palestinians in September 2000. However, Israel continues to search for militants and has taken control of seven of eight major West Bank cities and towns, enforcing curfews and making arrests.

The high-level talks were to focus on ways to ease the frustrations and burdens faced by about 700,000 Palestinians as a result have lived for several weeks under Israeli military control.

On Monday, during a break in the curfew in the West Bank town of Qalqiliya, several thousand Palestinians attended the funeral of 9-year-old Shukri Daoud. The boy died after suffering head injuries in June, when Israeli soldiers fired on Palestinians who had violated the curfew.