Police from the Palestinian Authority (PA) carried out a dawn raid on a house in the northern West Bank town of Qalqilya in order to arrest the Hamas fighters, sparking a gun battle in the streets, police said.
The two dead fighters were named as Mohammad Samman, the local commander, and Mohammad Yasin, a member, of Hamas's military wing, the Izz al-Din al-Qassam Brigades.
The owner of the house also died in the firefight.
Witnesses said Samman and Yasin had taken refuge in the house.
There were reports of curfew in Qalqilya but the PA denied its imposition.
The incident is sure to further stoke tensions between Fatah, led by Palestinian President Mahmoud Abbas, and Hamas.
"These kinds of clashes have happened in the past, but these are by far the most serious in the West Bank," Al Jazeera's Nour Odeh, reporting from Ramallah, said.
The bodies of the Hamas commanders and the house owner were buried under tight security, apparently to avoid further confrontation, she said.
The funeral of the PA officers was attended by Salam Fayadh, the Palestinian prime minister; Said Abu Ali, the interior minister; and the entire top brass of the PA's security force.
Abbas, speaking from Amman, Jordan, hailed the security officers for their "professional work", saying that the PA would "strike with an iron fist" anyone who challenges its authority and the law.
Hamas decried the killing over mosque loudspeakers in Gaza City.
Fawzi Barhoum, a Hamas spokesman, said there was no chance of further reconciliation talks with Fatah after the "escalation by security services of Abu Mazen [Abbas] and Fatah against Hamas and its leaders in the West Bank".
He said "Fatah should choose - dialogue with us or doing the dirty work of the Zionist enemy".
Egypt, which is trying to broker a reconciliation between Hamas and Fatah, has set July 7 as the deadline for its efforts.
Abu Obeida, an al-Qassam Brigades spokesman, accused Abbas's forces of playing into Israeli hands by mounting the raid.
"We call on the Palestinian people in the West Bank to reject and denounce these acts of the suspicious personnel and to confront and stand up for these high treasons"
Abu Obeida, Izz al-Din al-Qassam Brigades spokesman
"They gave to the Zionist forces more than what the Zionist forces could do," he said.
"We call on the Palestinian people in the West Bank to reject and denounce these acts of the suspicious personnel and to confront and stand up for these high treasons ... the blood of those martyred in Qalqliya will remain a curse and we hold Mahmoud Abbas with direct responsibility."
Odeh said "none of the neighbours or witnesses we spoke to said or confirmed that they saw or heard Israeli forces".
"There were additional troops called in from nearby cities that were not separated from Qalqilya by Israeli checkpoints - in other words, there was no security co-ordination with the Israelis - at least, that we know of," she said.
"This was a purely Palestinian-on-Palestinian operation."
Adnan Damiri, a PA spokesman, said that security forces tried to prevent casualties in the densely populated neighbourhoods of Qalqilya by attempting to engage Hamas in dialogue, but that their offer was refused.
He said that during the arrest, police discovered Hamas leaflets containing "incitement against the Palestinian Authority and against the Palestinian security branches".
"We consider what happened today as very dangerous," Damiri said. "It was an attempt to destroy any hope of resuming the (reconciliation) dialogue."
Al Jazeera's Ayman Mohyeldin in Gaza said confidence between Hamas and Fatah is "really at an all-time low".
"After today's incident involving the killings and tit-for-tat accusations, very strong words came out from Salah al-Bardawil, a leading member of Hamas and the parliamentary bloc in the Gaza Strip.
"He said Hamas is going to carefully reconsider withdrawing from [the reconciliation] talks."
|Abu Obeida, centre, said Fatah had crossed a 'red line' by carrying out raids on Hamas [AFP]
Mohyeldin said thousands of Gazans, including Ismael Radwan, a senior Hamas politician, held a protest march to condemn the attack on al-Qassam Brigades members.
"The rally was attended by several other Palestinians, all of whom described the PA security forces' actions as an act of treason and collaboration with Israeli security forces," Mohyeldin said.
"They have been pointing to the recent round-up of Hamas members in the West Bank, including one incident in the city of Hebron, where a member of the group's military wing was killed by Israeli security forces."
According to Hamas, 22 of its members were arrested in the West Bank on Saturday.
Mohyeldin said many in Gaza were pointing an accusing finger at the PA security forces, suggesting that they tipped off the Israelis. "Those are very strong words of accusations and do nothing but to divide the Palestinians even more," he said.
Hamas says that Fatah-dominated security forces are pursuing a politically motivated crackdown against Hamas activists, a claim which Fatah has also made about Hamas in Gaza.
But in his comments to the media on Sunday, PA's Damiri said: "We in the Palestinian security branches are not a political force. We are security. We will not allow any Palestinian party to have guns and threaten civilians."
Odeh said that over the the past several months, Palestinian security forces had announced and shown tapes of confiscated weapons in mosques in Qalqilya.
"They have refrained up until this incident from pointing the finger at Hamas, but in line with PA policy, the security apparatus has been uncompromising in making sure that no one carries guns except security personnel," she said.