Israeli Prime Minister Benjamin Netanyahu has ordered the suspension of a controversial measure banning Palestinians from riding the same buses as Jewish settlers when returning from Israel to the West Bank.

"The proposal is unacceptable to the prime minister. He spoke with the defence minister this morning and it was decided that the proposal will be frozen," an official in Mr Netanyahu's office said.

The three-month pilot project was due to have begun today.

Hundreds of Palestinians travel  to work in Israel from the occupied West Bank each day, mainly in the construction industry, using travel permits each time they cross.

Under the proposed ban Palestinian workers would need to change buses to avoid riding vehicles carrying Israelis after crossing back into the West Bank.

Israeli public radio said Defence Minister Moshe Yaalon had agreed to the ban, adding that it would allow "better control of the Palestinians and those leaving Israel and reduce security risks". 

Israeli settlers in the West Bank have called for years for Palestinians to be banned from public transport there, arguing their presence poses a security risk.

Separately, two Israeli policemen were wounded in annexed east Jerusalem when they were hit by a car driven by a Palestinian, who was then shot dead, police said.

The incident took place in A-Tur on the Mount of Olives, with a police spokeswoman saying the driver had veered off the road and struck two border policemen, before being shot dead by a third.