JERUSALEM, Sept 22 (Reuters & JMCC) - An Israeli security guard killed a Palestinian on Wednesday in an East Jerusalem district that sees frequent tensions over its Jewish settler enclave, local residents and Israeli police said.

The guard shot the 32-year-old man while driving through Silwan before dawn, a police spokesman said, adding he told investigators he had opened fire after his car was blocked and stoned by dozens of Palestinians.

Local residents said the Israeli worked as a guard for the small Jewish settlement in Silwan, and that at least two other Palestinians were wounded in the shooting. The dead man was identified as Palestinian Samer Sarhan.

Israeli police entered the Haram al-Sharif area, also known as the Temple Mount, but did not proceed into the Dome of the Rock or Al-Aqsa Mosque.

Police said they entered the plaza to push back Palestinians who had thrown rocks at the nearby Jewish prayer site the Western Wall.

The Palestinians withdrew into the mosque, Islam's third-holiest shrine, and there were no immediate reports of casualties or further confrontations, a spokesman said.

Palestinian officials said the killing of a 32-year-old resident of East Jerusalem and subsequent police response had undermined nascent U.S.-sponsored peace negotiations. Israeli authorities said the guard, who provided government-funded protection for a small Jewish settlement in the Silwan district, opened fire on dozens of Palestinians who had blocked and stoned his car before dawn.

It was his life or theirs, said Ariel Rosenberg, spokesman for Israel's Construction and Housing Ministry.

Silwan residents took to the streets after the incident, overturning two cars, torching two others and throwing rocks at police and passersby. Police said they responded with teargas, water cannon and stun grenades.

Israel captured East Jerusalem along with the West Bank from Jordan in the 1967 war and regards all of the city as its capital, a status not recognize internationally. Many settlers claim a Jewish biblical birthright to the occupied territory.

Palestinians want East Jerusalem as the capital of the state they intend to establish in the West Bank and Gaza Strip, a demand at the heart of U.S.-sponsored peace talks with Israel which resumed this month.

Palestinians torched cars and threw stones and firebombs at Israeli police in Silwan last month after residents reported that settlers had tried to cross a mosque courtyard to reach an ancient spring where religious Jews conduct ritual ablutions. (Writing by Dan Williams and Ali Sawafta; Editing by Janet Lawrence)