Troops raiding the outlying al-Faraa refugee camp exchanged fire with three fighters holed up in a camp mosque at dawn, the Israeli army and Palestinian officials said on Thursday.
The army said the three men opened fire at troops from inside the mosque, and that soldiers returned fire.
Inside Nablus, Israeli soldiers left the narrow stone alleyways of the old town, where the operation had centred since it began on Sunday, lifting a curfew that confined tens of thousands of Palestinians to their homes.
"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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The Israeli forces regrouped around an apartment building in a newer neighbourhood, surrounding it with jeeps and armoured vehicles, using loudspeakers to demand the surrender of wanted men thought to be hiding in the building.
After civilians poured out, soldiers rushed through the entrance and explosions were heard inside, but it was not immediately clear whether armed men were holed up there.
The Israeli troops later withdrew to the outskirts of the city, Palestinian security sources said.
Soldiers pulled out in the afternoon but nevertheless remained in position on the outskirts of Nablus, the sources said.
The Israeli military says that 10 wanted fighters have been arrested since the operation began.
One Palestinian civilian has been killed.
In another development on Thursday, suspected Palestinian fighters shot and wounded an Israeli settler driving through the occupied West Bank, medical sources said.
The 55-year-old man from Tzofim settlement near the West Bank town of Qalqilya was "evacuated to hospital with light to moderate wounds", Yerucham Mandola, a Magen David Adom rescue services spokesman, said.
The Israeli army said it was searching for the assailants.