The man, Raed Tbeileh, 24, was shot and suffered serious head injuries during the raid in the Old City of Nablus early on Friday.
He was transferred to an Israeli hospital but died shortly afterwards.
An Israeli army spokeswoman confirmed that a wanted Palestinian activist belonging to al-Aqsa Martyrs Brigades had died in hospital.
He said that during an arrest operation in Nablus, Palestinian gunmen had opened fire, Israeli troops had returned shots and identified a hit.
Tbeileh's death raised the overall toll since the outbreak of the Palestinian uprising in September 2000 to 5,045 people, based on an AFP count.
The majority of the victims have been Palestinians.
Elsewhere, a heavy explosion destroyed the home of an elderly Palestinian woman in the village of Burin, south of Nablus, local security sources said.
The cause of the explosion was not immediately clear, but emergency workers were dispatched to the scene to rescue the woman from the rubble.