The decision casts doubt on initial reports that the youth had infiltrated the outpost. The Palestinian, Salman Safadi, 16, was killed by a settler on Tuesday at the Yitzhar South outpost near Nablus.
A military official initially said Safadi had tried to enter a home there and was shot by its owner. On Wednesday, however, military officials said Safadi was unarmed and had no known affiliation with Palestinian resistance groups.
Police spokesman Shlomi Sagi said the army had turned over the case to police and that they were beginning a formal investigation.
Yitzhar is inhabited by several dozen young settlers who have violently resisted attempts by the Israeli army to evacuate the outpost.
Local Palestinians say the settlers have frequently assaulted them, stolen their property and systematically destroyed their olive trees.
Armymen have faced violence in
trying to evacuate outposts
Medical officials at Rafidiah Hospital in Nablus said Safadi was shot in the back, and that one of his arms had been broken, apparently the result of an assault.
Residents of the nearby Palestinian village of Orif said Safadi and several friends set off on Tuesday to warn Palestinian olive harvesters that Yitzhar residents were preparing to attack them.
They said Safadi disappeared from the group but denied he had entered Yitzhar.
Speaking on condition of anonymity, a military official said Safadi had entered the village, but declined to describe the entry as an infiltration. The official said the outpost is off limits to Palestinians and that Safadi's presence there was illegal.
Israel has pledged to remove dozens of unauthorized West Bank outposts under the US-backed "road map" peace plan, but has largely failed to do so. Palestinians criticise the outposts as illegal settlement on land they claim for a state.