Witnesses said it took place at the Askar refugee camp.
Aljazeera’s correspondent said the Israelis raided a building housing suspected Hamas member Khamees Abu-Salim.
He quoted residents as saying that Abu-Salim and an Israeli soldier were killed in the raid.
"During the night, a pinpoint operation was mounted to arrest a senior fugitive," an Israeli military source said.
"Massive fire was opened at the force from the third floor of a building. The soldiers returned fire and there was a series of explosions on the same floor, indicating there were explosives there. As a result, the floor collapsed," he said.
Hamas officials called the attack, "a flagrant violation," and vowed that they would "not stay silent."
Hamas is among the Palestinian resistance groups which declared a ceasefire with Israel on 29 June.
The conflict has abated dramatically since the truce went into effect despite regular Israeli raids in the West Bank.