Early on Wednesday morning, troops entered the Aqabat Jaber camp near Jericho to arrest three Islamic Jihad members, the army said.
The soldiers surrounded three houses and called on the suspects to come out, and two of the men surrendered, according to the army.
The army said it fired at one of the houses to get the remaining suspect to emerge. Troops then entered and saw a "suspicious figure" under mattresses and, thinking he was armed, fired and killed the man.
It added that no weapon was found.
Saeb Erikat, the Palestinian legislator for Jericho, condemned the killing, saying that Israeli raids and closures were making life intolerable for the people of Jericho.
"This is part of an open war against the Palestinians," he said.
The raid came a day after police cars backed by helicopters chased down a van along the main Jerusalem-Tel Aviv highway, pulled out a suspected attacker and safely detonated a 7kg bomb that was concealed in a bag, police said.
Police said the attackers could have used the bomb in a suicide attack or by planting the explosives in a crowd.
Shaul Mofaz, the Israeli defence minister, told the Israeli Ynet website that Iran was pushing Islamic Jihad to carry out an attack before Israel's election next week.
"We know that Iran transferred in the last month $1.8 million to the Islamic Jihad organisation in order to carry out terrorist attacks against Israel," he said.
Palestinian attacks have altered the outcome of previous Israeli elections and a successful bombing could weaken support for the centrist Kadima Party of Ehud Olmert, the acting Israeli prime minister, the frontrunner in the polls.
Security forces have extended a closure on the West Bank and Gaza to election day, preventing Palestinian workers from entering Israel.
Israel has also greatly restricted movement through the Gaza Strip's main cargo crossing at Karni over the past two months - citing reports that Palestinians were planning attacks there - causing shortages of bread and other essential items in Gaza.
Under US pressure, Israel has sporadically opened Karni since Monday for imports into Gaza. The crossing was opened again on Wednesday and Israel also opened an additional crossing into Gaza to allow emergency food aid to enter from Egypt, Israeli officials said.
The opening of Kerem Shalom at the junction between Israel, Egypt and Gaza on Wednesday, was the first time that crossing was in operation.
7000 tonnes of food
Egypt is sending the Palestinians 7000 tonnes of food, mostly wheat, rice and sugar through Kerem Shalom, Salim Abu Safiah, director-general of the Palestinian border authority said.
Palestinians have accused Israel of shutting Karni as a punishment following resistance movement Hamas' victory in Palestinian elections on 25 January.
After previously denying such allegations, an Israeli official on Tuesday confirmed that the Karni restrictions were partly intended to send a message to Hamas, although he also said the security threats were real.