A driver at the Jordanian representation office was killed in the running gun battle which pitted police and preventative security against a new paramilitary force deployed by the Hamas-led Palestinian government.
Explosions pounded the city, bullets reverberated off walls and ambulances screeched through streets as clouds of acrid smoke filled the air.
Hamas supporters used at least two rocket-propelled grenades against police, dominated by the former ruling Fatah party loyal to Palestinian Authority president Mahmud Abbas, a security source and witnesses said.
One vehicle exploded in a ball of flames, as Hamas gunmen hunkered down in an empty extension under construction inside the parliament compound and neighbouring streets emptied as civilians ran for cover.
Fatah loyalists blamed Hamas for sparking the troubles saying members of the new Hamas-controlled paramilitary opened fire on security officers.
“Suspect parties” at play
A spokesman for the Islamists, Sami Abu Zuhri, accused "suspect parties" of sparking the troubles in a bid to destabilise the government, already isolated by Western economic sanctions.
"It's the start of civil war," hissed Ahmed, a Hamas gunman lying flat on his stomach and cocking a Kalashnikov assault rifle at security officers before opening fire.
Fatah and Hamas negotiators rushed into emergency talks brokered by Egypt in a bid to calm the situation but no headway was reported.
Mr Abbas, who arrived back in his West Bank headquarters after a trip to Egypt, is also expected to chair talks with all the Palestinian factions from Thursday in a bid to calm the soaring tensions.
Jordan called on the Palestinian Authority to open an immediate inquiry into the circumstances of the killing of 55-year-old Khaled Hassan al-Radaida, said an official in Amman.
Mr Abbas, who has been considerably weakened by the showdown with Hamas, called Jordan's representative in Gaza, Yehya al-Qarala, to offer his condolences.
The latest clashes came only hours after a Fatah militant was shot dead by Hamas gunmen in the southern Gaza town of Abassan, despite calls from the leadership of both sides to avoid a descent into civil war.
Mohammed Abu Taima, who belonged to Al-Aqsa Martyrs Brigades, an armed offshoot of Fatah, suffered fatal head wounds in the Abassan attack. Similar clashes in the same town last week left three people dead.
Civil war fear
Rivalry between supporters of Hamas, which thrashed Fatah in a parliamentary election in January and ended its monopoly on power, has increasingly spilled over into shootings and security chaos in the Gaza Strip and West Bank.
Assassination attempts against the heads of the security and intelligence services, both Fatah stalwarts, have further underlined fears of internecine warfare.
Mr Abbas declared on Sunday that "civil war is a red line which no one would dare to cross".
Hamas leaders have also sought to distance themselves from the violence, with government spokesman Ghazi Hamad accusing "suspect parties" of trying to "set Palestinians against each other".
Hamas resents that the security forces, packed with Fatah followers, remain Mr Abbas's responsibility and ineffective in clamping down on chronic anarchy.
The Islamists have consequently deployed thousands of members of a volunteer paramilitary - vetoed by the president - sending tensions soaring and forcing Fatah to beef up its own security forces.
Nicolas Pelham, an analyst from the International Crisis Group, said all-out conflict was a real danger.
"Everybody is preparing themselves that the national dialogue is going to fail ... All sides are preparing for the possibility of a major showdown," he warned.