Security sources said on Thursday that the army had notified the family of Eliyahu Asheri, 18, who went missing earlier this week, that they suspected they had recovered his body in the occupied West Bank, outside the city of Ram Allah.
Israel's Army Radio reported that the Palestinian group, the Popular Resistance Committees (PRC), said it had killed Asheri.
The PRC said earlier this week it had abducted Asheri and threatened to kill him if Israeli troops did not break off an incursion into the Gaza Strip that began on Wednesday.
A spokesman for the group has not commented on the killing.
Israel has not confirmed that Asheri, of the Itamar settlement near the West Bank city of Nablus, had been kidnapped, but said he had been missing since Sunday.
Two Israeli security sources told Reuters that pathological tests were under way for final identification, but that they suspected the body found was that of the missing settler.