Ambassador Samir Sumaidaie, a supporter of the United States, said Mohammed al-Sumaidaie, the 21-year-old son of his first cousin, was shot by marines during a raid at his father's house in the village of al-Shaikh Hadid, near a US military base at the Haditha Dam on Friday.
"All indications point to a killing of an unarmed innocent civilian - a cold-blooded murder," said Sumaidaie, a Sunni.
"The marines were smiling at each other as they were leaving," he quoted the mother of the young man as saying.
Sumaidaie, in a telephone conversation with journalists, and in a lengthy written statement, called for an investigation into the killing, saying outrage over the incident could jeopardise public support for the US in Iraq.
In response to Sumaidaie, the US military said in a statement from Camp Fallujah, in Iraq, that the ambassador's allegations "roughly correspond to an incident involving coalition forces on that day in that general location".
"We take these allegations seriously and will thoroughly investigate this incident to determine what happened," said Major General Stephen Johnson.
On Tuesday, 100 Iraqi and 1000 US soldiers launched a fresh offensive against fighters in the Arab western province of al-Anbar, focusing along the Euphrates river between the cities of Haditha and Hiyt, the US military said.
"The marines were smiling at each other as they were leaving"
Sumaidaie said the incident undermined Iraqis' trust in the US and raised questions about whether other innocent civilians have been killed.
"The multifaceted damage such a crime causes is profound," he said. His accusation was first reported in the British newspaper The Times.
Mohammed al-Sumaidaie, an engineering student, was at his father's house with his mother and other family members on 25 June when marines knocked at the door just after midnight (0810 GMT), the ambassador said
The marines, who were accompanied by an interpreter, asked the young al-Sumaidaie if there were weapons in the house, according to an account provided by his mother.
Family members last saw the young man alive when he went to another room to get a rifle that the family said had no live ammunition but only blanks, the ambassador said.
The Iraqi ambassador to the UN
has demanded an investigation
Soldiers beat one of al-Sumaidaie's brothers and the rest of the family was told to wait outside the house, the ambassador said.
When the marines left the house about an hour later, the interpreter told the mother that her son had been shot and killed, Ambassador Sumaidaie said.
The family found al-Sumaidaie dead with a single bullet wound to the neck.
"Americans come and rough up the youths in the village demanding information which they simply do not have," said the ambassador. "The village like other villages is terrified."
He said that the killing "must be investigated in a credible and convincingly fair way to ensure that justice is done".