The fighter killed in the attack on Tuesday was Khalid as-Shimbari, 21, a member of the Al-Aqsa Martyrs Brigades, a resistance group linked to Palestinian leader Yasir Arafat’s Fatah party.
The second casualty was Ibrahim Saliha, a 19-year-old civilian shot in clashes between the fighters and troops.
Another Palestinian civilian, identified by medics as Ahmad al-Masri, was seriously wounded during the raid.
Palestinian security sources had said early on Tuesday that Israeli troops rolled into the Bait Hanun area, levelling farmland and occupying a house.
An Israeli military spokesman said troops had opened fire on two Palestinians in the area during an operation targeting fighters who had fired homemade Qassam rockets at Israeli targets.
Meanwhile, Palestinian demonstrators clashed with the Israeli military on Tuesday as thousands of protestors marched against the building of the apartheid wall at the village of Al-Azawiya in the West Bank.
Israeli soldiers shot rounds of teargas to disperse the crowd.
The army has confiscated thousands of acres of Palestinian land to build the wall of concrete walls, razor wire, fencing and trenches.
Palestinians are enraged by the structure, which they say is a pretext to snatch more Palestinian land.
The Palestinians hope to build an independent state in Gaza and West Bank, lands that Israel occupied after the 1967 war.