The footage, released by Israeli human rights group B’Tselem, shows an officer running over to the girl as she plays in the street with her siblings in Hebron.
She is seen screaming and dropping her bicycle, which the armed officer then proceeds to step on as she starts to cry.
The girl then runs away as the police officer shouts at her, while holding his gun. His colleague proceeds to pick up the bicycle and throw it in nearby bushes.
B’Tselem identified the child as Anwar Burqan and said she had been playing with her 11-year-old sister and brothers aged seven and four when the incident happened on 25 July.
She had been riding her bicycle on the paved part of a road leading up to the Tomb of the Patriarchs/ Ibrahimi Mosque holy site, which is restricted for use by Jewish settlers and Israelis while Palestinians are ordered to use an unsurfaced pathway on the other side of a fence.
Anwar’s family live nearby in a flat that has no garden and frequently play out in the divided street, B’Tselem said.
Ranya, the girl's mother, told the Haaretz newspaper that since the incident took place her daughter is too frightened to leave the house.
“It was a trauma that will stay with her for her whole life,” she said.
“Even if she entered a place she wasn't allowed to enter, what danger or threat did she pose – she's only an eight-year-old girl.”
A spokesperson for the Israeli Border Police force, which guards Hebron’s many checkpoints, said an officer had been suspended over the incident.
“The Border Police views the incident with severity and is sorry for it,” a statement said.
“At the close of the initial investigation the Border Police commander ordered that the combatant be immediately removed from active duty.
“All investigative material was handed over to the Police Investigation Department, which began its investigation of the incident."
The confrontation, captured by Raed Abu Ramileh, whose home overlooks the street, has provoked fresh outrage over the treatment of Palestinians in Hebron, which is divided between Palestinian Authority and Israeli control.
B'Tselem said the confiscation of Anwar's bike was an example of "daily life" for Palestinians living under military occupation in the city.
Tensions frequently boil over into violent protests around Hebron's contested Old City, where there is a heavily guarded Israeli settlement.
Hebron has been the site of massacres of both Muslims and Jews, and has seen several attacks by Palestinians – who have been shot dead by security forces - during a wave of intensified violence that started last year.
The conduct of Israeli forces came under scrutiny in March after a soldier was filmed shooting a disarmed Palestinian man in the head as he lay injured on the ground following an attempted stabbing.
Since September last year, 34 Israelis and two American citizens have been killed in Palestinian attacks, while more than 200 Palestinians have been killed by Israeli security forces in the same period.
Officials said the majority were carrying out or attempting attacks, while the rest were killed in clashes with Israeli forces.