The fire fight on Friday evening marked the first violent clash over land formerly occupied by Israeli settlers since Israel's withdrawal from the Gaza Strip in September.
Five people, including two policemen, were wounded in the clash.
After the fatal shooting, dozens of people, some of them armed, vandalised a police station in the nearby town of Khan Yunus setting two police vehicles on fire, the governor of the area, Husni Zurab, said on Saturday.
Palestinian President Mahmoud Abbas has said the land will be used for the public good, including housing projects, universities and nature reserves. Private land claims will be examined, but plots expropriated by Israel for the settlements will not automatically be returned to their owners, officials have said.
Palestinian security sources said on Saturday that the half-acre plot of land was in the public domain and located in the area of the dismantled settlement of Neve Dekalim.
But without clear-cut maps of the area, it was not immediately clear whether the land was formerly part of Neve Dekalim, or nearby, they said.
Before Israel's pullout from Gaza, the settlers and the Israeli occupation army controlled about one-fifth of the crowded coastal strip.
The clash over land underscores Abbas's difficulties in imposing order in Gaza.
Two clans staked competing claims to the land in Friday's dispute, Palestinian officials said. One of the clans, the Astals, had fenced off the area.
President Abbas (L) is finding it
difficult to impose order in Gaza
When police came to tear down the fence, armed men fired at them, and a firefight erupted. Seventeen-year-old Naef Astal was killed and five people wounded, including two policemen.
Police arrested three people and took them to a lockup in Khan Yunus. Later on Friday, dozens of people broke into the police station, demanding the release of the detainees, and vandalised the building, police said.
Hamas, meanwhile, said on Saturday that it has asked Egypt to delay talks on renewing a truce with Israel until after the Palestinian parliamentary election on 25 January.
The Egyptian government had brokered an informal truce that expires at the end of the year, and has invited Palestinian resistance groups to Cairo to talk about extending the ceasefire for another year. Hamas spokesman Mushir al-Masri said his group had accepted the invitation, but that a date had not been set.
"The prevailing political atmosphere does not encourage such a dialogue [with Egypt] to take place soon"
Hamas political bureau leader
Earlier this week, the Damascus-based head of Hamas's political bureau, Khalid Mishaal, said his group was not inclined to renew the truce, citing repeated violations by both Israel and the Palestinian Authority.
"The prevailing political atmosphere does not encourage such a dialogue [with Egypt] to take place soon," Hamas quoted Mishaal as telling Palestinian prisoners in Israel's Ketziot tent camp in a telephone address. Mishaal's comments were released in a Hamas statement on Saturday.
In Israel, Prime Minister Ariel Sharon was mulling over whether to leave his Likud Party before spring elections and form a new party.
Israel Radio said Sharon's aides have completed the technical preparations for the possible registration of a new party, but that he has not yet decided.
Political commentators say a key motive for Sharon to quit Likud would be to throw off the restraints imposed by party hardliners. More than one-third of Likud's 40 legislators are rebels who repeatedly tried to block the Gaza pullout.
Sharon is thinking about leaving
his party before the spring poll
Israel TV's Channel Two said that if re-elected as prime minister, Sharon planned to withdraw troops from additional areas of the West Bank, and that a hardline Likud would restrict his manoeuvring room.
Others noted that even popular leaders who split from their parties have traditionally not done well in Israeli elections. Likud commands a well-oiled machine of activists, and Sharon would be hard-pressed to put together a similar operation in a short period of time.