Israeli occupation forces killed Itaf Yusuf, 45, a mother of five in the northern West Bank town of Tulkarim early on Monday, a Palestinian security source said.
Her two daughters, aged 22 and 20, were also present when the troops opened fire as they surrounded a house in pursuit of a "wanted" resistance fighter.
The soldiers had converged on the house in about 20 Jeeps, witnesses said.
Ahmad Zalat, husband of the dead woman, said: "We were sitting on the floor in our sitting room. Suddenly we heard heavy gun shots, we were terrified and moved to take shelter.
"Amid the chaos, my daughter was hit by a bullet in the leg and my wife was shot dead in the head."
He said Israeli soldiers did not allow an ambulance and medical care to reach his badly injured family members.
"The Israeli soldiers wouldn't allow the ambulance to reach our building in the beginning, but they allowed it eventually. They ordered the driver to stop 200m away from our building, and did not allow medics to carry my wife and daughters on stretchers.
"I had to carry them with the help of neighbours to the ambulance, but sadly we couldn't save my wife, and my daughter got a very serious injury in her leg. She was about to marry within days."
An Israeli army spokesman told AFP that "shooting broke out when a top official of Islamic Jihad in Tulkarem resisted arrest.
"The soldiers opened fire after having noticed suspicious movements around the house. Before that they had been calling on the Palestinian militant to hand himself over for one and a half hours and fired warning shots in the air," the spokesman said.
Israeli soldiers surround
Monday's death brought to 5,035 the overall toll since the September 2000 start of the second Palestinian uprising, the vast majority of them Palestinians, according to an AFP count.
One of Yusuf's neighbours, known as Abu Mahmud, said the shooting was not justified and there was unnecessary use of arm fire.
"What suspicious movement are they talking about?" he said. "Military machinery and heavily armed soldiers were besieging the building and fired warning shots; it was normal civilians in the building getting scared and confused."
"I do not know how the well-trained Israeli soldiers could not realise that the so-called suspicious movements were just scared people trying to protect themselves," he said.
Yusuf's daughter, Ansam, said: "She was hit in the head and taken to hospital."
Doctors declared her dead. Ansam and one of her sisters also suffered wounds to the lower body.
The Israeli army stepped up raids against Palestinian resistance fighters spearheading a more than five-year-old Palestinian uprising after a Palestinian bomber killed nine people in an attack at a Tel Aviv restaurant last month.