The violence was the latest to hit Jenin, in the north of the Israeli-occupied West Bank, an area that has seen near daily clashes between Israeli troops and Palestinian gunmen since an escalation that began in March.
Jenin deputy governor Kamal Abu al-Rub told AFP that Wednesday's raid was "the most violent that the occupation army has carried out since the start of the year".
The Palestinian health ministry recorded four dead and 44 wounded by live fire in the latest Israeli operation.
Among them was Abed Hazem, whose brother Raad was named as the killer of three Israelis in a shooting spree in Tel Aviv's busy nightlife district in April.
Raad Hazem was shot dead after a massive Israeli manhunt. Israeli forces have been pursuing Abed and Raad's father Fathi for months.
At a mosque in Jenin refugee camp, hundreds of people prayed for the slain Abed Hazem, whose body was wrapped in a Palestinian flag, with young male mourners kissing his forehead.
The Israeli occupation army only immediately confirmed two deaths during an operation it said targeted "two suspects involved in a number of recent shooting attacks".
"While surrounding the residence in which both suspects were located, an explosive device detonated and the suspects opened fire toward the security forces. The security forces fired back according to standard operating procedures and the two suspects were both killed," the army statement said, confirming Hazem as one of the men killed.
The European Union, in a tweet, said it was "alarmed by the spike in violence today in Jenin following the (Israeli) incursions".
Since March, Israel has launched hundreds of operations in the northern West Bank in pursuit of alleged militants, including in Jenin and nearby Nablus.
The raids have sparked clashes that have killed dozens of Palestinians, including fighters.
Israel has occupied the West Bank since the Six-Day War of 1967 but parts of the territory are nominally controlled by the Palestinian Authority, in accordance with terms set out in the 1994 Oslo peace accords.
'Policy of escalation'
Analysts have warned that the dramatic increase in Israeli West Bank raids is further weakening the unpopular Palestinian Authority, with Palestinians increasingly condemning president Mahmud Abbas's administration for its security cooperation with Israel.
Following the latest Jenin unrest, Abbas's spokesman, Nabil Abu Rudeina, accused Israel of "tampering with security and stability through pursuing a policy of escalation," in a statement published by the official Palestinian news agency, Wafa.
Israel has demanded that the PA security forces do more to crack down on alleged militants, and Prime Minister Yair Lapid vowed earlier this month that he would "not hesitate to act in any place that the Palestinian Authority does not maintain order".
Israel is on high alert over the Jewish holidays, which began Sunday with New Year, or Rosh Hashana, and continue Tuesday with Yom Kippur, the most sacred day of the Jewish calendar.