An Israeli soldier and a senior Palestinian militant have been killed during an army raid in the West Bank town of Nablus.
Israeli forces demolished the building
Shooting broke out after Israeli forces tracked a group of wanted men to a seven-storey building in the town, the Israeli army said.
Troops ordered residents from the apartment block which was then blown up.
The raid is the latest operation in an intensified campaign by the Israeli army against militants, which began after a suicide bombing in Jerusalem two weeks ago.
The number of people killed in that attack rose to 22 on Friday when a man died of his injuries.
The latest violence further undermines the shaky position of the Palestinian Prime Minister Mahmoud Abbas, says the BBC's Richard Miron in Jerusalem.
Soldiers searching the apartment block with dogs came under fire and gunmen inside hurled hand grenades at the troops, an army spokesman said.
Four soldiers were injured, one critically, and three suspected militants were arrested.
The Israeli army said the dead man was Mohammed Hanbali who they described as the leader of the armed wing of Hamas in Nablus and involved in organising numerous suicide bombings.
It was later reported that a crowd of 3,000 Hamas supporters gathered to denounce Israel's action.
A Hamas militant told a crowd at the Jabaliya refugee camp in the Gaza Strip they would avenge Hanbali's death, the AFP news agency reported.
"It is not the time for truce or talks," Nizar Rayan said.
Residents of the destroyed building tried to salvage what they could from the rubble.
Dore Gold, an adviser to the Israeli Prime Minister Ariel Sharon, acknowledged that the destruction would bring hardship to the families that lived there.
The power struggle appears to be coming to a head
"Nonetheless, the war we are facing now has been imposed on us," Mr Gold told the Associated Press.
"Israel is not seeking to be in Nablus, but is only there because the area is a constant source of terror attacks on Israeli civilians."
On Thursday, Mr Abbas - also known as Abu Mazen - made a dramatic plea to the Palestinian legislative council for stronger backing in his power struggle with Yasser Arafat.
In a speech to MPs, who were reviewing his first 100 days in office, Abu Mazen called on legislators to
back him or sack him.
Abu Mazen also called on the United States to lift its boycott of Mr Arafat - "the elected, legitimate, constitutional and historical president of the Palestinian people".
Mr Arafat was not present at the meeting - he remains isolated in his Ramallah headquarters.
The prime minister urged Palestinians not to give in to the "spiral of action and reaction" and not to take unilateral action that would undermine Palestinian national unity and further isolate their case.