Israeli police are investigating the fatal shooting of a 22-year-old Arab Israeli after video footage emerged showing the man was retreating from police when he was shot.

The shooting sparked large protests, with thousands taking to the streets and dozens burning tyres and hurling rocks at police.

Police said officers opened fire in the Arab village of Kfar Kana in northern Israel early on Saturday against a knife-wielding man attempting to stab policemen.

Unknown-sourced footage later appeared to portray a different story. The grainy security camera material showed a man repeatedly banging on the window of a police vehicle. When officers emerged to confront him, he began to backpedal and was then shot. Police evacuated him to hospital where he died.

Police spokeswoman Luba Samri said police were investigating the incident to determine whether proper protocol was followed.

She said a police cruiser was in the village seeking to arrest a man who had hurled a stun grenade at police. She said a relative of the suspect, 22-year-old Heir Hamdan, then confronted police and tried to stab them, putting their lives in danger.

However, the footage, allegedly taken from a closed circuit security camera, shows the man making a stabbing motion with an object against the vehicle's windows while policemen were inside.Once they stepped out, he took a few steps back before being shot.

Ms Samri said the matter was under investigation and that police would not comment further until they had specific findings.