The Israeli soldiers drove into al-Bireh on Wednesday and took up position around a three-storey apartment building amid the sound of gunfire, reports AFP.
They detonated explosives at the gate, and soldiers ordered occupants to put down any weapons and leave with their hands up.
Troops entered two more buildings - one containing the West Bank headquarters of Palestinian leader Mahmoud Abbas' Fatah party and the other the ministry of civilian affairs.
Another explosion took place at the gate of a fourth building that contained advertising offices.
A Palestinian security source said several Israeli military vehicles had entered al-Bireh and sealed off the town, which is located next to the West Bank's administrative centre of Ramallah.
The Israeli military confirmed troop activity in the area but refused to provide details.
Local security sources said a member of governing Palestinian faction Hamas was believed to be inside one of the buildings.
However, Israeli public television reported that the invasion could be related to the case of a missing Jewish settler who disappeared in the occupied West Bank.
Israeli officials have not confirmed the disappearance of 18-year-old Elias Asheri, but his mother said he had indeed gone missing and appealed for his safe release.
The armed Palestinian group, the Popular Resistance Committees, showed reporters a photocopy of Asheri's photo ID and renewed threats to kill him unless Israel stopped an offensive in the Gaza Strip.
The group also said it was part of the joint capture of a 19-year-old Israeli soldier on Sunday.