An army spokesman said: "Our forces are operating in Nablus to discover caches of arms and explosives and to arrest those responsible for attacks against Israel."
The army claim to have found an explosives laboratory and that soldiers had been shot at in several places and returned fire.
Four Palestinians were lightly wounded by rubber bullets in the clashes, medics said. The army said that two soldiers were also lightly wounded.
The spokesman for the Israeli army said: "There were brief exchanges of fire and our forces also used rubber bullets and tear gas to disperse Palestinian demonstrators who had thrown rocks at them."
"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
Send us your views
Witnesses reported 80 jeeps backing several bulldozers the Old City, Ras al-Ain and al-Jabal al-Shamali neighbourhoods of Nablus.
The size of the operation indicates that the military operation will not end soon, according to Al Jazeera's correspondent there.
The bulldozers pushed rubble into piles on main roads to make them impassable, witnesses said, while snipers took positions on rooftops in the Old City and the neighbourhood close to Raefedia hospital.
Troops placed about 50,000 people under curfew in the centre of Nablus and closed the main entrance to the city.
Jeeps blocked entries to two main hospitals in the city, al-Watani and Raefedia, said Ghassan Hamdan, a doctor there.
"We are suffering, Nablus is suffering, from this closure," Hafiz Shahine, the deputy mayor of the city told Al Jazeera, "the shops are closed and streets and blocked in the Old City, no-one can get out of their homes."
"Nablus has been under seige for six years," he said.
Schools and a university in the city announced that they had cancelled studies due to the curfew.