The officers came under heavy fire yesterday while looking for suspects hiding among abandoned homes slated for redevelopment in the Almosara area of Awamiya, on the Gulf coast, the ministry said in a statement.
Police "responded as necessary," wounding the suspect Waleed Talal Ali, aged about 18, who died in hospital, it said.
Awamiya, a town of 30,000 in the Shiite-majority Qatif district, was the home of Nimr al-Nimr, a Shiite cleric put to death in January last year for "terrorism."
Awamiya has seen repeated security incidents in recent years.
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Ali was among a group of nine wanted suspects, the interior ministry said, adding that the derelict homes in Almosara had been used for planning "terrorist activities".
A local resident said people have been living for more than a month in Almosara resisting the redevelopment effort.
The have no water, and their electricity comes only from generators, the resident told AFP, asking for anonymity because "the situation is getting worse."
But the government has cut dialogue with the Shiite community on this and other issues, the resident said, calling for efforts to build trust between the two sides.
A witness said he heard a sound like a "bomb" and then saw smoke rising over the area.
The ministry said police had acted in the interest of citizens' safety "and to protect development projects in Awamiya".
The violence was only the latest recently in Qatif.
On Thursday a "terrorism" suspect was shot dead and a policeman wounded during a firefight in the area.
Local citizens are "very upset" over the violence, the resident said, adding: "We need to find a solution.
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