There were exchanges of fire early on Tuesday, as Israeli soldiers invaded the Balata camp in the northern West Bank, backed by two helicopter gunships, said Palestinian security sources.
A 12-year-old boy was seriously wounded in the head by a rubber bullet, said Palestinian medics.
Israeli troops seized four multi-storey buildings on the outskirts of Balata camp and carried out a house-to-house search with dogs.
The Israeli army described the raid as a routine operation to arrest Palestinian resistance activists.
Occupation soldiers arrested four resistance activists in the camp before slapping a curfew on it.
Israeli forces also arrested two Islamic Jihad activists near the West Bank city of Ram Allah, reported Aljazeera.
Meanwhile, senior State Department official David Satterfield held a three-way meeting with Palestinians and Israelis on Monday evening about ways to ease Israeli-imposed hardships on Palestinians.
Checkpoints dot the landscape
around the city of Nablus
The talks came after a weekend of shuttling between leaders of both sides, in an effort to break a deadlock over the US-backed "road map", said diplomatic sources.
Israeli political sources said the talks, held at a secret location, could help pave the way for a long-delayed summit between Palestinian Prime Minister Ahmad Quraya and his Israeli counterpart, Ariel Sharon.
But it was unclear whether the impending meeting was discussed.
Palestinian officials said they wanted to keep the focus strictly on requirements in the "road map" for Israel to help ease hardships of Palestinians.
The Palestinian economy has been crippled by three years of Israeli army blockades and blanket closures, which Israel claims are meant to stop activists. But Palestinians and human rights' organisations say they are collective punishment.
"Whatever they end up discussing, the good thing is that the two sides are talking," said a Western diplomat. He cautioned, however, that expectations for significant progress were low.
Dov Weisglass, Sharon's chief of staff, was expected to lead the Israeli team, and Palestinian chief negotiator Saib Uraiqat was to head the Palestinian delegation, said political sources.
An Egyptian delegation is expected to arrive in the occupied Gaza Strip on Tuesday, to hold talks with representatives of Palestinian resistance factions.