An Israeli soldier was shot and killed in an overnight attack at a checkpoint in east Jerusalem, the Israeli army said Sunday.

A police spokesperson had announced earlier that a manhunt was underway for an assailant who had "shot and severely injured two Israelis" at a checkpoint near Shuafat Palestinian refugee camp.

A third person, whose nationality was not specified, was hit by "shrapnel", according to Magen David Adom (MADA) -- the emergency medical services that are Israel's equivalent of the Red Cross.

On Sunday morning, the Israeli army confirmed in a brief statement that "an (Israel Defense Forces soldier) was killed as a result of being critically injured by a shooting attack".

"The soldier was evacuated to a hospital for further medical treatment, and was declared dead."

In the aftermath of the attack, blood covered the paving stones at the checkpoint in Israeli-annexed east Jerusalem, which was closed and cordoned off with red police tape.

Dozens of officers were deployed around the crossing and inside the refugee camp, where fireworks were launched.

The force said it had deployed a helicopter and special forces as part of the manhunt. The Palestinian Red Crescent Society said its medics were being prevented from entering Shuafat refugee camp.

Israeli Prime Minister Yair Lapid described the shooting as a "severe" attack.

"My heart is with the wounded and their families this evening. Terror will not defeat us, we are strong even on this difficult evening," the premier said in a statement.

Israel has controlled east Jerusalem since the 1967 Six-Day War and later annexed the territory in a move not recognised internationally.

Earlier Saturday, the Red Crescent said its medics treated five people near the Old City of east Jerusalem, including one who was hit with a rubber-coated bullet.

Israeli police said the force arrested seven children and one adult suspected of "participating in unrest, throwing stones and attacks on police officers" in the area, resulting in one officer being lightly wounded.

Crowds of Muslims had earlier gathered at Jerusalem's Al-Aqsa mosque compound for celebrations marking the birth of Islam's Prophet Mohammed.

Palestinian scouts paraded through the Old City before reaching the holy site, which is also sacred to Jews as the Temple Mount.

Jewish worshippers are marking a series of religious festivities, with the Sukkot holiday starting on Sunday evening.