There was no immediate claim of responsibility for the Sunday attack, the first of its kind in four months, at a hitchhiking post outside the Gush Etzion bloc of settlements about 15km south of Jerusalem.
"A Palestinian passed by in a car, let off a burst of fire, and struck down people standing at the hitchhiking post. There are wounded and apparently fatalities too," Shaul Goldstein, a settler leader in Gush Etzion, said on Israel Radio.
An Israeli military source spoke of a "shooting incident with casualties" but had no further detail for the moment.
Palestinian factions entered into a tacit ceasefire early this year, greatly reducing, but not entirely halting violence in a revolt that erupted in 2000.
The last such attack was in June, when Palestinian resistance fighters killed two teenage Jewish settlers in a drive-by ambush at a hitchhiking post near Hebron, not far from Sunday's ambush.
Sunday's attack came after the arrest of hundreds of Palestinians in Israeli occupation army raids around the West Bank in the past few weeks. Armed resistance groups had vowed revenge.
Israel completed a withdrawal of settlers and soldiers from the Gaza Strip in September after 38 years of occupation; but continues to expand larger settlements in the occupied West Bank.
Palestinians want both territories for a future state.