Witnesses said soldiers surrounded a hideout used by Thabit
Ayyada, 24, leader of Hamas's military wing in Tulkarim, and shot him dead in the ensuing clash on Tuesday.
An Israeli army spokeswoman confirmed that the pre-dawn raid targeted a "senior fugitive", and said troops had first tried to arrest him.
The man was killed after he stormed out of his hideout and opened fire, she said. A soldier was slightly hurt.
His death brings to 4933 the total toll since the start of the Palestinian uprising in September 2000.
The vast majority of the dead have been Palestinians.
Israeli military sources said eight Palestinians wanted by the Israeli security services had been arrested in the West Bank overnight.
A declared "state of calm" under which Palestinian militants scaled back their attacks expired this month, but violence had still been kept largely in check ahead of legislative elections on 25 January in which Hamas is taking part for the first time.
Rifat Nasif, the group's political leader in Tulkarim, accused Israel of seeking to provoke bloodshed, and hinted at retaliation.
He said: "This crime was committed while Hamas is abiding by the state of calm. The aim is to torpedo the calm. We won't remain silent."