Palestinian sources said the army imposed a tight curfew on the city's old quarter early on Thursday, with military bulldozers closing all routes in and out with huge barriers and dirt piles.
Israeli snipers took up positions on rooftops amid reports of heavy shooting and explosions.
"They are destroying our streets and infrastructure and terrorising civilians," said Muhammad Nasr, who lives in the Yasmina quarter.
"In a nutshell, they are ganging up on a totally defenceless civilian population."
Hanin Khwaira, a local journalist, told Aljazeera.net the invading forces were barring journalists and medical personnel from accessing the Old City.
She pointed out that soldiers were blowing up gates and doors and shooting randomly.
"They are shooting at every moving thing, including stray cats and dogs," she said.
The Israeli army claimed the purpose of the latest incursion was to "apprehend 'potential terrorists' who may be planning to carry out attacks against Israel".
Eitan Arusi, an Israeli army spokesperson, told Aljazeera.net Israel was not interested in "harming innocent Palestinian civilians".
However, Nablus officials pointed out that the army was "terrorising and harming innocent civilians"."Israel knows, and the world ought to understand, that Palestinian resistance against Israel is no more than an effect of the Israeli occupation which is the root cause of all violence, tension and instability in this region," said Shahin.
"When an army goes into action in the midst of a heavily populated area, the result cannot be anything but harming civilians and shedding their blood. You don't have to be a military expert to understand this," said Mawaffaq Hanbali.
He pointed out that the Israeli army was rounding up all males from 16 to 50-years old at schoolyards in two neighbourhoods.
"They are shooting
at every moving thing, including stray cats
In the spring and summer of 2002, the Israeli army carried out a two-month campaign in Nablus, killing up to 100 people, the bulk of them civilians, and destroying much of the town's ancient old quarter.
Palestinian officials have accused Israel of seeking to ignite a fresh cycle of violence by reinvading and ransacking Palestinian population centres.
"How can we convince our people of the dividends of peace when all they see are soldiers rampaging in their streets and Israeli tanks raping their cities and villages?" said Yacub Shahin, a Palestinian Information Ministry spokesman.
"Yesterday they told [Egyptian Intelligence Chief Umar] Sulaiman of their desire to restore calm and refrain from repressing the Palestinians, and now they are sending their tanks to Nablus."
Asked to comment on Israeli army claims that militants from the northern West Bank were trying to transfer explosives to the Ram Allah region, which would be used against Israel, Shahin said the Israeli occupation and persecution of the Palestinians was "the ultimate terror".
Eyewitnesses say snipers were
taking up positions on rooftops
Earlier, the Israeli army shot and killed four Palestinians in the Gaza Strip and the West Bank.
The army said two resistance activists were killed during an infiltration attempt into a military outpost in the northern Gaza Strip.
A third Palestinian was killed outside a Jewish settlement in the southern part of the Gaza Strip and the fourth during a raid on an electronics shop in Nablus.
Since the outbreak of the second intifada nearly 46 months ago, the Israeli army has killed more than 3300 Palestinians, 80% of them civilians or people not involved in the hostilities, according to Palestinian sources.
The figure reportedly includes as many as 650 people under the age of 17.
Moreover, thousands of other Palestinians, mostly civilians, have been injured or seriously maimed.
During the same period, Palestinian resistance groups killed as many as 940 Israeli soldiers and settlers.