An army spokeswoman, according to Reuters, confirmed soldiers opened fire during the incident at Beit Omar, near the Palestinian city of Hebron, saying they had feared for their lives as protesters threw rocks and petrol bombs and rolled burning car tyres at them.
The slain 27-year-old Palestinian was a relative of the Islamic Jihad militant who was being buried. Their family said the militant had died of health problems that were neglected during his incarceration in an Israeli prison.
Israel's Prisons Service denied this and said the militant had been freed from custody three months ago.
Palestinian witnesses and medical officials said the Israeli troops fired both live and rubber bullets in Friday's incident.
The army spokeswoman said the soldiers at first used non-lethal "riot-dispersal means" but, with the Palestinians undeterred, resorted to shooting live small-calibre bullets.
These were aimed at the lower body of the Palestinians targeted, she said, and soldiers had reported four hits. The Israeli army had heard of a Palestinian fatality in the incident and was investigating, she said.