A boy was seen being forced into a car in Shufat early on Wednesday. Within hours, a partly-burned corpse was discovered in the forest.
Israeli police were unable to confirm the motive, but Palestinian sources said it appeared to be a revenge attack for the murder of three Israeli teens.
Later, Palestinians clashed with Israeli police near the boy’s home.
The protesters threw stones at the officers, who reportedly responded by firing sound bombs, tear gas and rubber bullets.
The mayor of Jerusalem, Nir Barkat, called for restraint.
“This is a horrible and barbaric act which I strongly condemn,” he said in a statement.
“This is not our way and I am fully confident that our security forces will bring the perpetrators to justice.”
Initial reports said the boy was abducted in the early hours of the morning near his father’s shop in the Arab district of Shufat in East Jerusalem. Witnesses say he was bundled into a white car.
A few hours later his body, partly burned and bearing marks of violence, was found abandoned in a forest in the western outskirts of the city, the report said.
Israeli police spokesman Micky Rosenfeld said they were looking to see if there was a connection between the missing teenager and the body that was found.
Officers were looking into possible criminal or nationalistic motives for the killing, he added.
A senior official from the Fatah movement of Palestinian Authority President Mahmoud Abbas told the Reuters news agency that his family had identified the body.
“The Israeli government bears responsibility for Jewish terrorism and for the kidnapping and murder in occupied Jerusalem,” said the official, Dmitry Diliani.
The killing comes a day after funerals were held in the West Bank for the three Jewish seminary students whose bodies were found near the city of Hebron on Monday, two-and-a-half weeks after they were abducted.
Thousands of people attended the ceremony in Modein, among them Israeli PM Benjamin Netanyahu and President Shimon Peres.
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