Palestinian officials say the child Ahmed Musa was killed by a live bullet fired by an Israeli border policeman.
Israeli media reports say an initial police investigation showed an officer used live rounds against protesters.
About 3,000 people took part in the funeral march from Ramallah to Nilin shouting slogans denouncing Israel.
Eyewitnesses say a dozen Israeli army vehicles were parked at the entrance to the village and troops fired a tear gas grenades to disperse the crowd.
Controversy
Ahmed Moussa died during a protest against Israel's barrier in the occupied West Bank.
Regional Governor Said Abu Ali said an autopsy showed Ahmed Moussa had been struck by a single bullet from an M16 assault rifle which entered his forehead and exited the back of his head.
The planned route for Israel's barrier threatens to separate Nilin from hundreds of hectares of it olive groves. In addition, the Israeli army is replacing the main access road to the village with a tunnel under military control.
Daily demonstrations there frequently turn into clashes between stone-throwers and Israeli soldiers and border police, who usually use tear gas and rubber-coated bullets rather than live ammunition.
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Israeli officials said they would deploy anti-riot units at Nilin in future to deal with the protests.
Palestinian presidential aide Rafiq Husseini, who attended the funeral, is quoted saying the shooting was "truly a crime against a child".
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http://windowintopalestine.blogspot.com/2008/07/israeli-occupation-soldier-shoots.htmlhttp://windowintopalestine.blogspot.com/2008/07/israeli-troops-kill-palestinian-kid.html
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