An Israeli army spokesman said the fighter had approached a patrol in a threatening way outside Kfar Neama, north of Ram Allah and an M-16 assault rifle and ammunition were found next to his body after he was shot dead.
He was identified as an Islamic Jihad member and two other men of the group from the area were arrested , the spokesman said.
In the last two months, there has been a drop in Israeli-Palestinian violence, but peace efforts have not been making any headway.
A US-backed "road map" peace plan has also been stalled by non-compliance from both sides.
US State Department envoy David Satterfield on Saturday urged Israel and the Palestinians to take concrete steps to revive the six-month-old road map.
It requires Palestinians to halt attacks and Israel to stop expanding settlements on occupied land to pave the way
to a Palestinian state in the West Bank and Gaza Strip by 2005.
No date for talks
Palestinian Prime Minister Ahmad Quraya said after meeting Satterfield that no date had been set for talks with his Israeli counterpart Ariel Sharon, on moving along the road map.
In an interview with Israel's largest newspaper on Friday, Quraya has warned Israel that an internationally condemned barrier it is building inside the West Bank will kill the peace plan.
Sharon has hinted he will unilaterally evacuate some Jewish settlements and set borders for a Palestinian state along the barrier, whose planned route veers into the West Bank to
incorporate settlement blocs, if the road map goes nowhere.