The victim, Ari Fuld, 45, was well-known amongst settlers as a pro-Israel advocate. According to his Twitter account, he had planned a lecture tour in the United States in November.
Two Israeli police commandos were wounded in the raid in the city of Jenin, a spokesman said. Such flare-ups have been rare in the West Bank.
Israel on Tuesday destroyed the West Bank home of a Palestinian accused of aiding in the October 2015 murder of a Jewish settler couple in the Israeli-occupied territory.