Israeli and Palestinian security sources have confirmed that a member of Hamas was killed on Monday.
Aljazeera's correspondent in Nablus, Hasan al-Titi, said: "Twenty-seven year-old Ihsan Sawahna was killed by Israeli forces about two hours ago.
"Israeli tanks and armoured vehicles entered Nablus at around midnight. Tanks moved into the area known as Jabal Shimali, after which a gun battle broke out between Israeli forces and Palestinian fighters.
"The tanks shelled a few buildings in the area causing major damage to some homes.
"Sporadic gunfire continued throughout the night," al-Titi said.
Israeli security sources say the army responded after it came under fire when it entered Nablus to arrest Sawahna, a local Hamas member.
Al-Titi also said another battle broke out when Israeli tanks and soldiers moved closer to Sawahna's home on Monday morning.
Palestinian security sources have confirmed that 27-year-old Sawahna was killed in the shoot-out.
Nablus residents said the latest incursion by Israeli troops ended an hour ago at about 10am (0800 GMT) when the tanks were seen leaving the area.
Three Israeli soldiers were also wounded in the process, two of the injuries were described as light while one soldier was injured more seriously, according to the military source.