“We arrested three of the murderers,” said one Israeli military source after the raid late on Monday.
At least 15 armoured vehicles and two bulldozers surrounded the police station in the West Bank town.
Troops demanded over loudspeakers that police give up the suspects.
The army fired shots at the building when the suspects did not immediately give themselves up, security sources said.
An Israeli army spokesman said soldiers had encircled a building in which “the murderer of Eliahu Asheri is hiding”.
The body of Asheri, an 18-year-old Jewish settler abducted by Palestinian fighters, was found dumped in the West Bank on Thursday, adding to tensions in the worst crisis between Israel and the Palestinians since Hamas took office in March.
The Popular Resistance Committees, a group which has also jointly claimed the capture of an Israeli soldier, said it killed the abducted settler.
Israeli air strikes
Early on Tuesday, an Israeli aircraft fired a missile into the northern Gaza Strip , killing one person and wounding two, Palestinian security sources said.
The army said it had fired at militants who were laying explosive devices in an area close to Israeli forces.
Israel aircraft also fired missiles at an Islamic University building in Gaza city. The university is considered a Hamas stronghold.
The building, where the Hamas-dominated student council meets, was heavily damaged.
Israel has been building up forces at the northern edge of the Gaza Strip for a possible extension of an offensive following the soldier’s capture.
Israeli soldiers also carried out a raid on a Hamas office in Nablus late on Monday.