* 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 Abbas statement)
By Noah Browning
JERUSALEM, July 2 (Reuters) - The body of an abducted Palestinian youth was found in Jerusalem on Wednesday, raising suspicions he had been killed by Israelis avenging the deaths of three abducted Jewish teens.
News of the discovery of 16-year-old Mohammed Abu Khudair, who was last seen being bundled into a van earlier in the day, triggered clashes between rock-throwing Palestinians and Israeli police in the city.
Palestinian President Mahmoud Abbas accused Jewish settlers of killing Abu Khudair and demanded that Israel "mete out the strongest punishment against the murderers if it truly wants peace".
Israeli Prime Minister Benjamin Netanyahu urged police "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".
Police said they had found a body in the wooded outskirts of Jerusalem. Abu Khudair's father told Reuters the force had told him the body was his son.
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 corpses were discovered 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.
Abu Khudair's cousin said the 16-year-old was grabbed off the street after leaving his home in Jerusalem's Arab neighbourhood of Shuafat, to go to morning prayers with friends.
"Somebody ran into the house to say one of the boys had been dragged into a white van, so (Mohammed's) mother called the police," the cousin, Naima, said.
The abduction came a day after the three Jewish seminary students - Gil-Ad Shaer and U.S.-Israeli national Naftali Fraenkel, both 16, and Eyal Yifrah, 19 - 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 - originally a reference by ultranationalist Jews to making the government "pay" for any curbs on Jewish settlement on land Palestinians seek for a state.
Hebrew graffiti found on a building in the West Bank city of Nablus on Wednesday read: "Price tag, Jewish revenge."
Tensions were 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, Nidal al-Mughrabi in Gaza and Ali Sawafta in Ramallah; Writing by Jeffrey Heller and Noah Browning)