Independence celebrations have been marred by violence
An explosion near the West Bank town of Nablus has killed a commander of the Palestinian militant group Hamas wanted for attacks on Israelis.
In the Gaza Strip, a one-year-old Palestinian child was also killed in a clash involving Israeli soldiers in the town of Khan Younis.
Israel has sealed the Palestinian territories as a security measure while they celebrate their 55th Independence Day on Wednesday.
Local residents in the village of Zawata, near Nablus, said they believed an Israeli rocket had hit the building where 28-year-old Hamas commander Amin Menzalawi was hiding.
Israeli troops have been on a high alert
But Palestinian firefighters reportedly said the blast had come from inside the flat and Israeli military sources have denied any connection to the explosion.
The man killed in Zawata was a member of Hamas's armed wing who had been on the run from Israel for two years.
Palestinian and Hamas sources say he was killed by Israeli soldiers who had imposed a curfew on the village on Wednesday morning before opening fire on his flat.
Israeli forces have killed scores of Palestinian militants during the current uprising.
Dozens of militant bombers have also been blown up by their own devices while preparing for attacks.
A Palestinian child in the Khan Younis refugee camp was also killed on Wednesday after being hit by a bullet in front of his house - apparently from an Israeli gun.
His mother said that she had been standing outside her home with the young boy in her arms when she heard him crying and looked down to see him covered in blood.
Israeli troops are on high alert
He died later in hospital.
BBC correspondent James Rodgers said that the camp is next to a block of Jewish settlements and there are frequent exchanges of fire between Palestinian fighters and Israeli troops guarding the settlements.
An Israeli army spokesman called the incident "unfortunate" and said that Israeli soldiers had returned fire after coming under attack from Palestinians, the Associated Press news agency reports.
Israeli independence celebrations have been marred by Palestinian attacks.
A Jewish settler was killed by gunmen near Ramallah on Monday night in an attack claimed by the Al-Aqsa Martyrs Brigades group.
His six-year-old daughter and an Israeli soldier were also seriously injured in the attack.
Mortar shells fell overnight in the Gaza Strip, three striking the Jewish settlement of Neve Dekalim.
No-one was injured but independence celebrations were cancelled as settlers took shelter.
Israeli festivities began with a concert in Tel Aviv on Tuesday evening and are due to continue until Wednesday evening when President Moshe Katsav and Prime Minister Ariel Sharon attend a ceremony in the Jerusalem Theatre.
Soldiers will be honoured throughout the day with special mention for veterans of the 1948 war which brought Israel into being as a state.
Correspondents say the celebrations have been scaled down compared to recent years party because of economic problems, and the security forces are out in greater numbers.
Palestinians will commemorate the defeat of the Arab armies - the Naqba, or Catastrophe - next week.