Among those who surrendered was Ahmad Saadat, leader of a PLO faction and mastermind of the 2001 assassination of an Israeli cabinet minister, the Israeli military announced on Tuesday.
The main targets of the raid were Saadat and four accomplices in the killing of Rehavam Zeevi, the Israeli tourism minister in 2001.
In addition, Israeli forces seized Fuad Shubaki, the mastermind of an "illegal" weapons shipment to the Palestinian Authority several years ago.
Israel's West Bank commander, Major-General Yair Naveh, said 15 others were also arrested.
Two Palestinian security officers were killed and 23 other people were wounded in the raid.
Earlier, Israeli troops took control of the prison compound in an operation to arrest jailed Palestinian resistance leaders.
Gunfire rang out and explosions rocked the area as Israeli forces launched their raid on Tuesday.
Bulldozers pulled down the compound as Israeli troops called through loudspeakers on Ahmad Saadat, the leader of the leftist Popular Front for the Liberation of Palestine (PFLP), and his comrades to surrender.
Palestinian guards were forced
to lay down their weapons
Saadat and three other PFLP members have been jailed in Jericho, a prison under US and British supervision, since August 2002 after his faction claimed the killing of Zeevi the Israeli minister.
But at least 150 Palestinian prisoners and guards gave themselves up, Israeli military sources said.
Gideon Ezra, Israeli public security minister, confirmed that troops were on a mission to arrest the four PFLP members almost a week after Mahmoud Abbas, the Palestinian Authority president, reiterated that he was ready to free Saadat.
The slain guard was named by a Palestinian security source as Ibrahim Abu al-Amin. He was shot dead inside the compound by Israeli gunfire.
The agreement that kept six Palestinian prisoners under foreign watch in a Jericho jail was forged in an effort to end the Israeli siege of then-Palestinian leader Yasser Arafat's headquarters in the West Bank City of Ram Allah four years ago.
Israeli troops had surrounded the compound during Operation Defensive Shield in April 2002, demanding Arafat should turn over the six men who had sought refuge inside.
George Bush, the US president, negotiatedd the deal with Ariel Sharon, then the Israeli prime minister, that sent the six men to a Palestinian prison in Jericho. In return, Israeli soldiers pulled back from Arafat's compound.
After winning Palestinian parliamentary elections on 25 January, Hamas leaders said they wanted to release Saadat.
In a lecture at a women's gathering in West Bank on 7 March, Abbas said he would not mind releasing Saadat if PFLP sent him a written promise saying the movement would not hold the PA responsible for anything that might happen to Saadat after his release.
US and British officials sent a letter to Abbas last week, accusing the Palestinians of repeatedly violating the agreement and saying the security situation at the prison needed to be improved immediately or the monitors would leave.
Palestinian prisoners were told
to strip down to their underwear
The Israeli operation on Tuesday drew a furious response from Ismail Haniya, Hamas' prime minister-designate, who criticised the "dangerous escalation" and warned Israel against any attempt on the life of Saadat and his comrades.
For his part, the Israeli public security minister told public radio: "This operation was ordered by the prime minister in the fight against terrorism. We are committed to the murderers of minister Rehavam Zeevi remaining behind bars."
A spokesman for the Palestinian interior ministry in Gaza City said the British and the Americans had left the premises shortly before the operation began.
"We have information that the British and Americans left the prison this morning," Tawfiq Abu Khussa told AFP.
"The Americans and British left 15 minutes before the operation started. The Israelis asked the police and security forces to drop their weapons and not resist. If they refused, they said they would assault the compound," Abu Khussa said.
"We warn Israel against any incursion in the prison because it is under American and British control by international agreement."
Aljazeera's correspondent in Palestine Walid al-Umari quoted witnesses as saying that about 20 Israeli military vehicles on Tuesday surrounded the Palestinian presidential office and the Jericho prison.
The jail housed leftist Palestinian
politician Ahmad Saadat (file)
The forces imposed a curfew on the area adjacent to the prison amid intense shootings.
"We have been informed that gunfire was heard in the area, but no information whether the raid was targeting Saadat or surrounding the headquarters where many Palestinian activists are present," al-Umari said.
Mosques across Jericho called on citizens over loudspeakers to flock to the muqataa to protect the soldiers and prisoners inside the compound.
There were also demonstrations across the West Bank and Gaza Strip.
Hamas leader-in-exile Khalid Mishaal warned Israel against harming Saadat, saying it would be responsible for the consequences of its raid on the prison.
Speaking to Aljazeera, Mishaal also called on Palestinians to rally around the Jericho jail, being bombarded by Israeli troops.
"We condemn this Israeli crime and hold Israel responsible for any consequences arising from this crime and warn them against harming Ahmed Saadat ... and all the prisoners in Jericho," said Mishaal.
"I call on our people in Jericho to throng around the Jericho prison," he added.
Mishaal called on the UN, Muslim and Arab countries and the international community to "take urgent measures to stop this crime".