Police met resistance when they went to demolish buildings that had allegedly been constructed illegally.
They say they responded with tear gas after being fired at but local people say the resident who died was shot.
Another 19 local people, and more than 30 police officers, were injured and the operation was halted.
The mostly poor residents of al-Warraq Island, on the capital's northern outskirts, suspect the authorities want to build a luxury resort there.
Egypt's interior ministry accused local people of firing shotgun pellets and throwing stones at police.
Residents told AFP news agency they had not received advance warning about the move.
Much of the housing in the area is believed to be "informal" (built illegally), lacking amenities such as clean water and a proper sewage system.
One person has been killed in the Egyptian capital Cairo in clashes between police and alleged squatters on an island in the River Nile.