The immediate speculation in both Israeli and Palestinian media – and at the time of writing still not formally confirmed – was that the missing 17-year-old, Mohammad Abu Khdair, may have been the victim of a revenge killing by rightwing Jewish extremists for three Israeli teenagers abducted and murdered three weeks ago on the West Bank.

According to family and eyewitnesses Abu Khdair was bundled into a dark coloured car late by three men close to his home in the East Jerusalem neighbourhood of Shuafat while en route to prayers.

Amid calls for calm and a swift investigation by the Israeli prime minister, Binyamin Netanyahu, Israeli police spokesman Micky Rosenfeld confirmed that police received a report early on Wednesday that an Arab teenager was "forcibly pulled into a vehicle" and that an hour later a body was discovered in a separate part of the city.

According to an unnamed Israeli security source quoted by Reuters the suspicion is that the teenager had been kidnapped and murdered, possibly in retribution for the killings of the Israeli teenagers, whose bodies were found on Monday and buried on Tuesday.

That suspicion was further heightened by comments made by Jerusalem's mayor, Nir Barkat. "This is a horrible and barbaric act which I strongly condemn. This is not our way and I am fully confident that our security forces will bring the perpetrators to justice," he said in a statement.

The latest incident has ratcheted up already high tensions between Israelis and Palestinians after a night in which extremist Jews rampaged through parts of Jerusalem chanting "death to Arabs" and beating several civilians.

Nabil Abu Rdeneh, a spokesman for the Palestinian president, Mahmoud Abbas, said Israel was being held responsible for the death and called on it to "find the killers and hold them accountable", according to the Palestinian official news agency Wafa.

At the home of Khdair, relatives showed the Guardian shaky footage purportedly showing the teenager talking to the men who abducted him. The footage was taken from a CCTV camera in front of his uncle's shop around 4am on Wednesday. Local residents said Israeli police had later taken away the originals of the footage.

While details remained sketchy, within a few hours many Palestinians appeared convinced that the teenager had been killed in a revenge attack "by settlers", further escalating already dangerous tensions.

The clashes, which involved stonethrowing and fireworks and police responding with plastic-coated rounds, cut off the Jerusalem light railway line.

At one stage the Guardian witnessed a group of masked youths with pickaxes attacking the railway stop.

Khdair had gone to pray at the mosque next to his house early in the morning and did not return.

According to the family, a Honda had passed on the street near to the house several times before stopping to talk to the boy.

Two women walking nearby also reportedly heard shouts.

While Israeli police and politicians have not confirmed whether the discovery of the body in the forest and the teenager's disappearance are linked, they were swift to condemn the murder.

Netanyahu urged authorities to swiftly investigate the "reprehensible murder" and called on all sides "not to take the law into their own hands".

Khdair's mother said that her son, a high school student,usually took a bottle of water to sat outside the shops next to the local mosque before praying.

"He' a good boy, not a troublemaker," she said as clashes took place outside her house. "I heard people say that someone was missing – someone had been kidnapped. I was so worried. I tried to find my son. When I couldn't I tried again. We need protection," she added. "We are surrounded by lunatic settlers who take our land and now take our children."

Israel has accused Hamas of abducting and killing the three Israeli teenagers, and has arrested hundreds of its members across the West Bank. Rocket fire from the Hamas-controlled Gaza Strip has meanwhile intensified, which have in turn been met with Israeli air strikes.