Israel media reported one of the Palestinians was Ahmad Badr, a Hamas leader in the southern West Bank city. In the same attack, a 13-year-old Palestinian boy was killed and two others wounded, they said.
The boy, was identified as Thair al-Siouri, Palestinian medical sources told AFP. Some Israeli media said the boy was aged 12.
The boy was hit by shrapnel from an Israeli tank round fired during the attack, early on Tuesday, which occurred after the soldiers surrounded a building in the town.
Israeli troops arrested one of the wounded Palestinians, eyewitnesses and hospital sources said.
Family members named the arrested man as Bassim al-Dajani, describing him as a factory worker and not a member of any resistance group. He had been injured in the neck, they added.
An 18-year-old girl was also wounded in the incident which began shortly before dawn.
The dead boy was hit by as he watched the battle from the balcony of a house about 100 metres away, relatives said.
A cousin said he had tried to convince him to go into the house because he was afraid he would be hurt, but the boy insisted on staying. Moments later there was a loud explosion and he came out to find the boy critically wounded.
The casualties occurred after Israeli soldiers besieged an eight-storey building owned by the prominent Kawasmeh clan in the Palestinian-controlled sector of the city in their ongoing campaign to kill or arrest resistance activists.
As they closed in they came under heavy gunfire from a number of resistance fighters.
About 500 Palestinians aged under 18 have died since the Intifada began in September 2000, the majority with bullet wounds to the head.
Witnesses said that the building was surrounded by two tanks and about 10 jeeps carrying scores of Israeli soldiers. Smoke was clearly visible from the building.
In Tulkaram, in the same region, Israeli patrols came under fire, and a bomb exploded near a Jewish settlement in Gaza, but there were no casualties in either incident.
Israeli troops also reportedly arrested three Palestinians in the West Bank town of Nablus and two more in Ram Allah.
In the Gaza Strip the bullet-ridden corpse of Muhammad Abd Allah al-Husni was removed on Monday morning near the town of Jabaliya.
According to local medical sources, 17-year-old Muhammad was shot repeatedly over several hours and prevented from calling for help on his mobile phone by an Israeli military post.
Israeli soldiers continued taking shots, mostly at al-Husni's legs, whenever he made any attempt to move or treat himself. When an ambulance arrived, medics were prevented from attending to him.
Locals recovered al-Husni's body which had multiple wounds to the head, neck, stomach and legs hours after al-Husni's fatal ordeal.
About 500 under-18s have died since the Intifada began in September 2000 - the vast majority of them with bullet wounds to the head.