Police said soldiers and border guards were carrying out a "counterterrorism operation" in the town of Al-Bireh near Ramallah when a knife-wielding man ran towards them.
The man "stabbed" one member of the security force and another "responded by shooting, killing the terrorist", police said.
Ahmad Al-Bitawi, director of the Palestine Medical Complex in Ramallah, said Ahmad Ramzi Sultan, 20, died "after being shot in the chest and abdomen during confrontations" on a road in Al-Bireh.
Bassam Sultan told AFP his nephew had been to dawn prayers when he encountered soldiers.
"Since it was written on his ID card that he is a resident of Gaza, Ahmad tried to hide from the army in a nearby building. That's when they shot and wounded him," Sultan said.
He added his nephew was then taken to the Beit El Israeli settlement where he died.
A Palestinian security source told AFP that following "an altercation", a soldier opened fire on Ahmad, killing him.
Violence and arrests have soared in the Israeli-occupied West Bank since the Gaza war erupted over Hamas's October 7 attacks.
Sultan said his nephew had been living in the West Bank since before the war.
At around dawn, an AFP journalist saw Israeli military vehicles in the area, with soldiers spotted entering shops, including at least one bureau de change.
Stone-throwing Palestinian youths were also seen.
Israel has occupied the West Bank since 1967 and regularly carries out raids there, although they are far less common in Ramallah, the territory's institutional heart.
At least 574 Palestinians have been killed in the West Bank by Israeli troops or settlers since October 7, according to Palestinian officials.
Sixteen Israelis, including soldiers, have been killed in violence with Palestinians in the same time, according to Israeli figures.
