According to witnesses, a 42 year old man, Anan al-Teibi, was shot in the neck in his home in the old city; medics said his son was also wounded and taken to hospital.
Neighbours said al-Teibi was hit by fired shots from a passing Israeli army jeep.
An Israeli army spokesman told the AFP news agency that troops had opened fire on three suspcious people standing on the roof of a house where Palestinian fighters were believed to be hiding.
"Two people were identified being hit. One was killed and the other was wounded and treated by the army. He was then taken for questioning after being identified as a member of the Islamic Jihad," he said.
Residents told of how the soldiers moved from house to house, searching every room.
Mohammed Attireh, 47, said all the residents of his building were ordered to stay in his apartment while troops searched the other homes; then the group of more than 20 people was taken to another house while his apartment was searched.
"The land of Israel belongs to both Jews and Palestinians - as long as there are people who reject this fact, the conflict will never be solved"
Iskander, Boston, US
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In another area of Nablus, the army surrounded a three-storey building, but encountered no resistance and found none of the wanted men, but witnesses said one apartment was set on fire in the operation.
The raid began before 0300 (0100 GMT) on Sunday, when about 80 jeeps, armoured vehicles and bulldozers poured into Nablus.
Soldiers closed the main entrance to the city and the bulldozers erected huge piles of rubble to block off key roads, witnesses said.
It was the first large-scale operation in the West Bank since Israeli forces entered Nablus last on 19 July and surrounded a security compound to arrest suspected militants.
It is thought the army are searching for seven members of the al-Aqsa Martyrs' brigade, and the army warned civilians not to hide the fugitives.
Supporters of the group, which is linked to the Fatah faction of Mahmoud Abbas, the Palestinian president, used a mosque loudspeaker to call for residents to protest against the raid.
"Al-Aqsa calls on the people to break the siege by the army," they said. "We have to stop the continuation of this aggression against the people."
The Israeli army broke into transmissions of local television and radio stations, broadcasting orders to people to remain indoors and warning that the clampdown would remain in effect for several days, residents said.
The military said the road closures and curfew were necessary to avoid civilian casualties.
Soldiers moved from door to door, entering homes in search of suspects, concentrating on the Old City, a section of rundown buildings and narrow alleyways.
At one point, a small group of nervous soldiers forced a Palestinian youth to lead them into a home. The soldiers then took him, along with several young Palestinian men, into a military vehicle.
|Troops in about 80 jeeps, armoured vehicles |
and bulldozers entered Nablus [AFP]
Mohammed Attrieh says he was treated in the same way, with soldiers ordering him to knock on the door of a neighbours' home; other troops were already inside.
Israel's Supreme Court in 2005 had banned the practice of using Palestinian civilians as 'human shields' to search homes for explosives or fighters ahead of soldiers.
The army had no immediate comment on Sunday's incident.
Sporadic clashes were reported as soldiers were pelted with stones and cement blocks, and exchanged fire with Palestinian gunmen, the army said.
Two soldiers and four Palestinians were wounded.
Major Avital Leibovich, an army spokeswoman, said soldiers had uncovered another explosive laboratory and small caches of weapons on Sunday.
Peace process 'threatened'
Palestinian officials said that the raid threatened new peace efforts.
Last week, Abbas, the Palestinian president, met Ehud Olmert, the Israeli prime minister and Condoleezza Rice, the US secretary of state, in Jerusalem.
Though little progress was made at the meeting, participants said they discussed the possibility of extending a ceasefire in the Gaza Strip to the West Bank.
"We condemn this military incursion," Saeb Erekat, an aide to Mahmoud Abbas, the Palestinian president, said..
"This will undermine the efforts that are being made to sustain the ceasefire with Israel."
The raid came at a sensitive time for the moderate Abbas, who is trying to put together a unity government with the radical Hamas group.
Hamas and Abbas's Fatah party reached a power-sharing deal earlier this month in Mecca, Saudi Arabia. Abbas said the deal forced the radical group to moderate its violently anti-Israel ideology and should pave the way for ending crushing international sanctions imposed on the current Hamas-led government.
Israel and Western donor nations have warned that they will not lift the sanctions if the new government does not agree to renounce violence and recognise Israel's right to exist.
Elsewhere in the West Bank, Israeli forces arrested two Palestinians they said were suspected of killing a Jewish settler.
|Erez Levanon was found stabbed to |
death in his vehicle [AFP]
The Shin Bet Security Service released photographs of the two 18-year-olds to the Israeli media after their arrest on Monday. Israel Radio said they were taken into custody after telling people in the village they had killed an Israeli.
Israeli security forces found Erez Levanon's body on Sunday in a vehicle on a West Bank road near the city of Hebron.
"The murder was carried out on the basis of a terrorist attack," Micky Rosenfeld, police spokesman, said. "He was stabbed several times."
In a statement issued in the Gaza Strip, Islamic Jihad claimed it had carried out the killing in was revenge for the mistreatment of Palestinians by settlers living in a heavily guarded enclave in the heart of Hebron.
Levanon lived in a settlement outside the city.