US condemns 'vicious terrorist attack' after Palestinian toddler burned to death by suspected Jewish settlers
Eighteen-month-old Palestinian toddler Ali Saad Dawabsh died while four family members were wounded in a fire at their homes in the West Bank (AFP)

A Palestinian toddler was burned to death and four family members wounded in an arson attack by suspected Jewish settlers on two homes in the Israeli-occupied West Bank on Friday.

The attack added to tensions between Israelis and Palestinians, sparking protests by hundreds of people and sporadic clashes, with Prime Minister Benjamin Netanyahu making a rare call to Palestinian president Mahmud Abbas in a bid to avoid further escalation.

While Netanyahu called the firebombing in Duma village near the northern city of Nablus "an act of terrorism in every respect", the Palestine Liberation Organisation said it held his government "fully responsible".

The death of 18-month-old Ali Saad Dawabsha was "a direct consequence of decades of impunity given by the Israeli government to settler terrorism", the PLO said in a statement.

Abbas called for an investigation by the International Criminal Court in The Hague.

The US State Department condemned the "vicious terrorist attack" in "the strongest possible terms," urging Israel to "apprehend the murderers" and calling on both sides to "avoid escalating tensions".

As Palestinian protests spread following the main weekly prayers in West Bank mosques, Israeli troops shot and wounded one protester during clashes in the city of Hebron, the army said.

Several thousand people also took to the streets in Duma for the funeral of the toddler, whose body was wrapped in a Palestinian flag.

The family's small home of brick and concrete was blackened and gutted by fire, a Star of David along with "revenge" and "long live the Messiah" spray-painted in Hebrew on the walls.

According to Palestinian security officials, four suspected settlers set fire to the house at the entrance to the village before dawn and fled to a nearby Jewish settlement.

The masked assailants reportedly hurled Molotov cocktails through the home's windows which were left open because of the summer heat.

The Israeli military and army radio said two homes had been torched by two assailants, with the child killed and four family members badly burnt.

Palestinian sources said those wounded included the toddler's parents -- mother Riham, 26, and father Saad -- as well as four-year-old brother Ahmed.

The mother was in critical condition with third-degree burns covering 90 percent of her body, an Israeli doctor told public radio.

The identity of the fourth person wounded as reported by the military was not immediately clear.

In the call to Abbas, Netanyahu said "everyone in Israel was shocked by the reprehensible terrorism against the Dawabsha family", his office said.

"We must fight terrorism together, regardless of which side it comes from," he added.

Both Netanyahu and President Reuven Rivlin visited the Israeli hospital where the family were fighting for their lives, while Israel's chief rabbi, David Lau, said "all Jews condemn this despicable murder".

- Tensions over settlements -

Vowing revenge, however, the Palestinian Islamist movement Hamas said the attack "makes the occupier's soldiers and settlers legitimate targets everywhere".

Israeli authorities mobilised a large deployment in Jerusalem's Old City around the flashpoint Al-Aqsa mosque and barred men under 50 years old from entering the complex.

The arson attack follows days of tensions over West Bank settlements, with right-wing groups opposing the demolition of two buildings under construction that the Israeli High Court said were illegal.

The demolition began on Wednesday, but Netanyahu the same day authorised the immediate construction of 300 settler homes in the same area, angering Palestinians.

Netanyahu holds only a one-seat majority in parliament following March elections and settler groups wield significant influence in his government.

West Bank settlements are viewed as illegal under international law, but not by the Israeli government.

They are also major impediments to peace negotiations with the Palestinians, who see the land as part of a future independent state, and Western nations have urged Israel to halt construction.

The EU on Friday called on Israel to show "zero tolerance" for settler violence, while Jordan, the only Arab state apart from Egypt to have signed peace with Israel, strongly condemned the arson attack.

"This ugly crime could have been avoided if the Israeli government had not ignored the rights of the Palestinian people and turned its back on peace... in the region," government spokesman Mohammed Momani said.

Extreme-right Israeli activists have for years committed acts of vandalism and violence against Palestinians and Arab Israelis, attacking Christian and Muslim places of worship and even Israeli soldiers.

Such attacks rarely lead to convictions.