Witnesses reported that around 30 military jeeps drove into the city centre on Tuesday and took up position around several houses where shooting rang out from both sides.
Troops then arrested eight people, including six brothers of the al-Bardadi family, who were all attending a dinner marking the breaking of the daytime Ramadan fast, a Palestinian security source said.
One of the brothers was a member of the al-Aqsa Martyrs' Brigades, an armed offshoot of the Fatah party, he added.
An Israeli army spokeswoman confirmed troops had entered the Palestinian city "to arrest wanted militants", adding that one Palestinian was wounded by Israeli fire in clashes that erupted during the raid.
In the northern West Bank, two Palestinians found carrying explosives were arrested by Israeli troops at a control post, Israeli military sources said.
In the southern Gaza Strip, a 21-year-old Palestinian was killed by Israeli gunfire, hospital officials said.
Amin Sufi was killed when Israeli soldiers fired at him in the east of the city of Rafah, they said.
In another incident in Gaza City, a missile fired from an Israeli aircraft wounded at least one resitance fighter, a Palestinian security source said.
An Israeli military spokeswoman said there had been "an air strike against a terrorist involved in attacks on our forces".
Palestinian journalists meanwhile have decided to boycott rallies where armed men randomly open fire, Aljazeera reported.
The decision came after Osama al-Silwady, a photographer, received gunshot wounds while covering a procession in Ram Allah.