Morwah Kamil, 25, head of the Islamic Jihad armed wing in Jenin, was killed in a gun battle that erupted after Israeli troops entered the town of Qabatiya, near Jenin, in an arrest raid.
Israeli Major Sharon Asman said Kamil was planning attacks on Israel when the soldiers went into Qabatiya to arrest him.
He threw a grenade at soldiers as they approached, and a shootout ensued, Asman said.
Dozens of townspeople poured into the street, firing guns, throwing firebombs and hurling rocks, Asman said.
A military bulldozer demolished a wall in the house where Kamil was holed up, he said.
Kamil's accomplices left the house and surrendered, he said. Kamil stayed put, and was shot and killed, Asman said.
One of the men firing from outside the house was also killed in the hours-long confrontation, and five Palestinians were wounded, the army said.
One Israeli soldier was slightly injured, it added.
"This crime by the Israelis will not pass without response from Islamic Jihad," said an Islamic Jihad spokesman in the West Bank, Khader Adnan.
Hours later, a Palestinian mortar attack on a Jewish settlement in Gaza killed two non-Israeli workers in one of the deadliest days of violence since the two sides declared a truce in February.
Palestinian fighters fired a mortar shell into a greenhouse in the Gaza Strip settlement of Ganei Tal.
One Palestinian and one Asian worker were killed, and five other workers wounded, the army said.
The mortar was one of six fired at the southern Gaza settlements on Tuesday afternoon, the army said.
Hamas claimed responsibility for several of the mortar attacks, but it was unclear if it was responsible for the attack on Ganei Tal.
Israeli soldiers killed an unarmed
man at the Egyptian-Gaza border
Several hours earlier, armed Palestinians in northern Gaza fired at least three homemade rockets at the southern Israeli town of Sderot, hitting a house but causing no injuries.
Hamas claimed responsibility for that attack, which it said came in retaliation for a visit by Jews on Monday to the Jerusalem holy site that was home to the biblical Jewish temples and now houses the Al-Aqsa Mosque, Islam's third-holiest shrine.
"Any attempt to defile or to harm Al-Aqsa Mosque means an open turf war in every corner of our homeland, Palestine," Hamas said in a statement.
Meanwhile, Islamic Jihad said they attacked several Israeli positions on Tuesday, including a miltary convoy south of Gaza and the Nafeh Decalem settlement.
In other violence on Tuesday, Israeli troops shot and killed a man who climbed over the fence at the Egypt-Gaza border and entered southern Gaza.
Israeli military officials said they thought the man was an Egyptian involved in weapons smuggling. No weapons were found on his body, the officials said.
Palestinians also fired an anti-tank missile at an Israeli military force along the Israel-Egypt border near the Gaza city of Rafah, and fired a mortar that landed inside Israel near the fence surrounding the northern Gaza Strip.
"Any attempt to defile or to harm Al-Aqsa Mosque means an open turf war in every corner of our homeland, Palestine"
No injuries or damage were reported in either case.
The clashes on Tuesday, which left a total of five people dead, exacerbated tensions already inflamed by a confrontation on Monday at a disputed Jerusalem holy site.
But Islamic Jihad and the Hamas militant group both said they had no intention of pulling out of the truce.
And in another development late on Tuesday, Palestinian Civil Affairs minister Mohammad Dahlan criticised Israel for treating Palestinians with "disdain" with regard to its planned withdrawal from the occiupied Gaza strip this summer.
Speaking after a meeting with James Wolfenson, the envoy for the international Quartet for Middle East peace, Dahlan said Israel had not provided the Palestinians with vital logistical information.