The Israeli sources say that Rami al-Tayah, 26, is head of the organisation's armed wing in the West Bank city of Tulkarim and has been hunted by Israel since 2002.
Witnesses said Israeli forces surrounded an apartment building in Tulkarim and took al-Tayah into custody.
One resident quoted a soldier saying to his comrades: "Don't kill him, we need him alive."
Israeli security sources say al-Tayah had allegedly established resistance cells that were responsible for attacks against Israelis.
Al-Tayah, the sources said, has evaded capture during the Palestinian uprising by hiding out among the local populace and moving regularly.
A member of the Islamic Jihad group and the owner of the apartment where al-Tayah was hiding were also taken into custody in the raid.
Israeli troops say they found two automatic rifles, a pistol and ammunition in the apartment.