"We have two dead people, a 28-year-old man and a baby girl of two months," said Dror Riechter, an emergency medical worker at the scene near the divided city of Hebron.
Other reports put the dead man's age at 30. Two other settlers were lightly wounded in the attack, medical sources said.
The shooting occurred as Israelis marked the Jewish New Year, Rosh Hashanah.
Israeli military sources confirmed that an attack had taken place at the Negohot settlement, which is around 10km southwest of Hebron.
The number of new settlers in the first half of 2003 showed a constant rate of population growth in the settlements that Palestinians, backed by the international community says are illegal - a statement Israel disputes.
The United States, Russia, the European Union and the United Nations said after a meeting in New York earlier on Friday that Israel has to stop building settlements.
It also urged the Palestinian Authority to crack down on resistance groups who carry out attacks on Israelis.
The Israeli interior ministry has said that 5415 Israelis have moved to the settlements since January, with the ultra-Orthodox West Bank settlement of Beitar Illit seeing the largest jump of more than 1000 newcomers.
The total settler population stands at 231,443.