The violence, the deadliest incident in the area in years, dealt a new blow to U.S-led peace efforts, which resumed late last month after a nearly five-year break.
Palestinian officials have accused the Israelis of stonewalling and using the process as a cover to build new Jewish settlements.
It was not known when talks will resume, but Palestinian officials said that they could begin again as early as Tuesday. They spoke anonymously as they were not authorised to talk to media.
Monday's clashes broke out when Israeli forces entered the Qalandia refugee camp, just outside of Jerusalem, on an overnight arrest raid.
Shai Hakimi, a spokesman for the paramilitary border police, said hundreds of Palestinians poured into the streets and hurled firebombs, concrete blocks and rocks at officers.
The Israeli military said soldiers rushed to the scene to provide backup and opened fire after they felt their lives were in 'imminent danger'.