Remember, it does not know any grammatical rules the way we do. When
figuring out a sentence, it relies on statistics. My guess is that
phrases like "Israeli kills Arab" are less likely to turn up in the
English corpus, and more likely to turn up in the Arabic, and the
other way around for "Arab kills Israeli". So, when it for some reason
becomes uncertain of what is the subject and object of a sentence, it
decides on what it thinks is "most likely".
What is certain is that it is automatic, and not a product of racism -
except possibly racist bias in the corpus the translator has been
trained on. Which could be the whole web.
Try translating "Israeli settler kills Palestinian man". I would guess
there are somewhat more mentions of settler violence in the English
corpus, so maybe that additional word is enough to push it to the
correct translation.
(I also agree with SPARKILL: If you use the translator for anything
important, you should always go through its output and correct obvious
mistakes - and be aware that since it is a statistical translator, it
will make errors such as these.)