Israel moved into Ramallah after a Hamas attack
The withdrawal from the villages of al-Tira and Beitunia represents a slight easing of the blockade which Israel tightened around Palestinian areas last week to pressurise Yasser Arafat to clamp down on Palestinian militants.
It comes a few hours after Israeli and Palestinian officials held their first joint security meeting since violence escalated last week.
Israel reoccupied several districts
of Ramallah last week following an attack by the militant Islamic group Hamas on a bus that killed 10 Israelis and wounded 30.
In another development on Thursday, Palestinian police trying to arrest a Hamas leader exchanged fire with his supporters outside a house in Gaza City.
The wanted man, Abdel Aziz al-Rantisi, refused to surrender and police withdrew to avoid further casualties after three officers and two civilians were wounded.
The police say Mr al-Rantisi is now wanted for resisting arrest and "instigating the masses to strike at national unity", according to a report on the Palestinian news agency Wafa.
Tactics rethought
Local mosques had broadcast appeals for Hamas supporters to come and defend Mr al-Rantisi and witnesses said hundreds turned up, some of them armed.
The BBC's James Reynolds in Jerusalem says the attempt to arrest Mr al-Rantisi is part of Palestinian leader Yasser Arafat's efforts to show the international community that he is taking steps against militant groups.
Sheikh Hassan Youssef, a senior leader of the group in Ramallah, said: "Hamas is studying the issue of suspending martyrdom attacks.
"It has not been decided yet, but the movement is aware of the interests of the Palestinian people and will take a decision that stems from their higher interests."
Mr Arafat called on Sunday for an end to armed conflict with Israel.
Hamas has carried out a string of suicide attacks against Israeli targets, including three earlier this month that killed 26 people.
On Tuesday, US Secretary of State Colin Powell telephoned Israeli Prime Minister Ariel Sharon and urged him to help create an environment in which Palestinians could step up their efforts to control militant groups.
Meanwhile, the Israeli army has acknowledged that its troops made a "professional mistake" when they planted a bomb that killed five Palestinian schoolchildren in the Gaza Strip on 22 November.
The bomb had been planted among sandbags from where Palestinian militants had fired at Jewish settlements.
Several officers will be reprimanded, the military said in a statement.