Palestinian officials condemned the raid on Sunday as a violation of agreements between the two sides.
Palestinian security officials said Israeli special forces entered Tulkarim before dawn and arrested 18-year-old Muhammad Shalhub.
Israeli military officials said Shalhub was an Islamic Jihad fighter who was preparing an imminent attack against Israelis and had already filmed the video testament customarily left by bombers.
Shalhub's sister Manar was shot and killed three years ago as she attempted to stab an Israeli soldier.
Tulkarim Governor Izz al-Din al-Sharif said he had registered a complaint with Israeli authorities over the incursion, which he said was a breach of the handover agreement.
"They need to coordinate with us when they want to enter," he said. "This is against all the agreements."
"They need to coordinate with us when they want to enter. This is against all the agreements"
Izz al-Din al-Sharif,
Israeli military officials said the agreement gave Israel the right to re-enter Palestinian territory in cases where a Palestinian attack was imminent.
Israel pledged to turn over five West Bank towns to Palestinian security control as part of an 8 February ceasefire agreement, but only Tulkarim and Jericho have been transferred.
Meanwhile in the southern Gaza Strip, Palestinian security forces were forced to stop an operation to destroy cross-border smuggling tunnels on Sunday after Israeli troops fired at them, security sources said.
Palestinian security officials were bulldozing a number of tunnels close to the border with Egypt when the firing started, the sources said, adding that the operation had been coordinated with Israel.
One Palestinian, who was operating a bulldozer at the time, broke his leg after hurriedly leaping out of the vehicle to avoid the gunfire.
In the wake of the shooting, Palestinian troops were forced to abandon the demolition operation, they said.
Quraya presented Wolfensohn
with two proposals
In other developments, Palestinian Prime Minister Ahmad Quraya and his cabinet on Sunday met outgoing World Bank chief James Wolfensohn, who is helping coordinate Israel's Gaza withdrawal.
In his new role, Wolfensohn is working on behalf of the Quartet of Mideast mediators - the US, UN, Europe and Russia - and is also charged with helping revive the Palestinian economy.
Quraya presented Wolfensohn with two proposals, the first for a short-term plan to revive the economy, rebuild homes destroyed in Israeli-Palestinian violence and find jobs for the unemployed.
The second, a long-term plan, would focus on reforms and rebuilding the Palestinian economy.
Wolfensohn said he was impressed with the plans. "I think we are off to a very good beginning," he said.