It was the latest in a series of similar incidents that have triggered public outrage over what rights activists say is police abuse.
Brig Gen Hesham Amer, police chief of the New Cairo district east of the Egyptian capital, said three policemen argued with the street vendor over the price of a cup of tea inside a sprawling residential compound in the area.
One of the officers then shot the vendor and two other people. The vendor was instantly killed. The official MENA news agency later quoted an unnamed security official as saying that Interior Minister Magdy Abdel-Ghaffar has referred the policeman to the prosecutor's office.
The body of the dead vendor was seen lying in the street. Police sealed the area and deployed riot squads to disperse the crowd.
Human rights groups say a culture of impunity among the Egyptian security forces has led to widespread police brutality. Trials of offending policemen are rare and when they do occur, sentences are usually appealed and subsequently reduced.