* Palestinian youth was abducted, witnesses say
* Suspicions he was killed to avenge slain Israeli teens
* Palestinians, Israeli police, clash in Jerusalem
* Netanyahu condemns killing, urges restraint (Adds Netanyahu statement, background)
By Jeffrey Heller
JERUSALEM, July 2 (Reuters) - The discovery of a body in a Jerusalem forest on Wednesday raised suspicions that a missing Palestinian youth had been killed by Israelis avenging the deaths of three abducted Jewish teens.
Rock-throwing Palestinians clashed with Israeli forces in Jerusalem after the news, but no serious injuries were reported.
Israeli Prime Minister Benjamin Netanyahu, in a statement, urged police to "to swiftly investigate who was behind the loathsome murder and its motive". He called on all sides "not to take the law into their own hands".
Palestinian residents in Shuafat, an Arab suburb of Jerusalem, told Reuters they had seen a teenager forced into a vehicle outside a supermarket on Tuesday night. They identified him as Mohammed Abu Khudair, 16.
An Israeli security source said Israel suspected the youth had been kidnapped and murdered, possibly in retribution for the killings of the Israeli teens, whose bodies were found on Monday, nearly three weeks after they were abducted in the occupied West Bank.
Israel says Palestinian Hamas militants killed them. The Islamist group has neither confirmed nor denied the allegation.
A senior official of Palestinian President Mahmoud Abbas's Fatah movement told Reuters the missing teenager's family had identified the corpse, found in the wooded outskirts of Jerusalem. The family was not immediately available for comment.
"The Israeli government bears responsibility for Jewish terrorism and for the kidnapping and murder in occupied Jerusalem," the Fatah official, Dmitry Diliani, said.
Israeli Internal Security Minister Yitzhak Aharonovitch said it was too early to draw conclusions as to the motive.
"We know of a boy who apparently was abducted and we see a link to the discovery of a body. This is still under investigation by the forensic labs and detectives," Aharonovitch told reporters.
On Tuesday, the three Jewish seminary students were buried in a funeral attended by tens of thousands of mourners.
While the teenagers were laid to rest in the city of Modi'in, several hundreds Israeli demonstrators, some chanting "Death to Arabs", blocked the main entrance to Jerusalem.
Cries for revenge have echoed throughout the decades-old Israeli-Palestinian conflict.
They can be heard at the emotionally charged funerals of Palestinians killed by Israel, and the phrase "May God avenge his death" is often invoked at the burials of Israelis slain by Palestinians.
But deadly Israeli vigilante attacks, in declared retribution for Palestinian assaults, have been rare in recent years.
More common are the so-called "Price Tag" incidents in which mosques and Palestinian property are torched or damaged - a reference by ultranationalist Jews to making the government "pay" for any curbs on Jewish settlement on Palestinian land.
Before Netanyahu issued his statement, Abbas, who had condemned the abduction of the three Israeli youths, called on the Israeli leader to condemn the killing of the Palestinian teen, the Palestinian state news agency WAFA said.
Tensions were also high in the West Bank, where around 40 Palestinians were arrested in raids on Tuesday, the latest in a campaign by Israel to cripple Hamas there.
Four people were wounded by live bullets early on Wednesday in an Israeli raid in the Palestinian city of Jenin.
Near Hebron, Israeli forces destroyed the home of a Palestinian arrested on charges of shooting dead an off-duty police officer in the West Bank in April.
Israel, which suspended the demolition policy in 2005 as a Palestinian uprising waned, says destroying the homes of Palestinians involved in attacks on Israelis has a deterrent effect. Rights groups have condemned the practice as collective punishment.
(Additional reporting by Ammar Awad, Ori Lewis, Maayan Lubell and Allyn Fisher-Ilan in Jerusalem and Noah Browning and Ali Sawafta in Ramallah; Writing by Jeffrey Heller and Noah Browning; Editing by Alison Williams)
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