Unofficial Israeli sources confirmed to Aljazeera’s correspondent the vehicle was targeted by Israeli helicopters in an assassination attempt.
The dead have not yet been identified due to the extent of the damage caused by the missile strike.
Palestinian security sources said the three dead were operatives of Hamas.
Witnesses described how Israeli jets were heard flying overhead shortly after two explosions were heard.
“A missile from the sky hit the car,” said Ahmad Ismat, 35, a farmer who was working in his greenhouse about 100 metres from the explosion.
Intense gunfire came from the direction of the settlement, about 500 metres away, he said.
Palestinian Prime Minister Ahmad Quraya condemned the attack.
“The Israeli government’s aim is to kill any attempt to restore quiet and revive the peace process,” he told Reuters.
An Israeli military spokesman said the car had been targeted as it was carrying “transporting senior Hamas terrorists who were recently involved in numerous terror attacks against Israeli civilian and military targets and were plannning additional attacks.”
Israel’s air force has routinely sent helicopter gunships and warplanes to kill Palestinian resistance fighters in airstrikes.
After the attack on Wednesday, the white car was engulfed in flames and black smoke.
Screaming crowds of people threw sand onto the wreckage and beat the flames with coats and scarves to try to put out the fire.
Palestinians try to pull out a body
A man leaned into the burning wreckage and used a blanket to lift out a charred, decapitated body and heaved it onto a stretcher.
“The explosion led to a huge fire in the car, I started to run with other farmers who live nearby,” said a witness who gave his name only as Bashir.
Some in the crowd gathered around the car lashed out at Yasir Arafat’s Palestinian Authority.
“I spit on the Palestinian Authority and those who brought them here,” one person at the seen screamed.
The last such strike came on Saturday night when a helicopter fired two missiles into a car, killing three Islamic Jihad members.
“In this kind of situation, attack is the best form of defence … We will pursue the terrorists – whoever they are and wherever they are”Moshe Yaalon,
Chief of staff, Israeli military
The Israeli military’s chief of staff, Moshe Yaalon, announced on Tuesday the army would intensify its operations against Palestinian resistance groups.
“In the light of the intensification of the activities of the terrorist organisations over the last few weeks, we will intensify our anti-terror operations,” Yaalon told army radio.
“In this kind of situation, attack is the best form of defence … We will pursue the terrorists – whoever they are and wherever they are.”
The latest deaths bring the overall toll since the start of the Palestinian Intifada in September 2000 to 3797, including 2843 Palestinians and 886 Israelis.