Israel has been tightening its grip on Palestinian areas
The sources say the killings were carried out in the West Bank town of Tulkarm by two gunmen at a building used by the Palestinian intelligence service.
The building is reported to have been abandoned after Israeli tanks moved towards the town as part of a widening offensive in the West Bank.
Troops backed by tanks have taken control of the town of Qalqilya, and more tanks were reported on the outskirts of Bethlehem.
The incursions came hours after Israeli Prime Minister Ariel Sharon declared war on what he called Palestinian leader Yasser Arafat's "terrorist infrastructure".
Mr Sharon had been speaking in a televised address to the nation after two suicide bombings killed 17 people and injured more than 30 on Sunday.
War warning
In Qalqilya the Israeli military said it was conducting searches for militants and weapons in order "to destroy the terrorist infrastructure" in the town.
Qalqilya is close to the Israeli cities of Tel Aviv and Netanya, which have both been targeted by Palestinian suicide bombers.
Power and water supplies were cut off as at least 60 tanks took up position, and there were reported of some exchanges of fire.
With Israeli tanks massed around Bethlehem, the Pope has appealed for prayers for the city - holy to Christians as the birthplace of Jesus Christ.
And he urged political and religious leaders to work to end "the tragic sequence of attacks and killing that bloody the Holy Land."
Islamic foreign ministers meeting in Malaysia have warned that Israeli military action against the Palestinians is dragging the region towards all-out war.
"Israel's terrorist actions and aggressive practices, posing a threat to international peace and security, and dragging the region towards an all-out war, necessitate immediate action by the UN Security Council," said ministers of the Organisation of the Islamic Conference (OIC) in Kuala Lumpur.
Protests
Anti-Israeli demonstrations have been taking place in several countries in the region.
Protesters took to the streets in several Egyptian cities, including Cairo, while around 1,000 students held a pro-Palestinian rally in Jordan.
In Lebanon, thousands of Palestinian refugees staged protest marches, vowing revenge if Mr Arafat is harmed and berating Arab countries for not doing enough to protect him.
'Enemy'
In his television address on Sunday night, Mr Sharon said Israel was "at war", and described Mr Arafat as the head of a "coalition of terror," who was directing attacks against Israeli citizens.
He said Israel would strike relentlessly at Palestinian militants. Only then, he said, would a ceasefire be possible.
Mr Sharon described Mr Arafat as an "enemy of the free world".
"We must fight this terrorism, in an uncompromising war to uproot these savages, to dismantle their infrastructure, because there is no compromise with terrorists," he said.
The prime minister convened his cabinet on Sunday to discuss the suicide bombings and the military offensive which has cornered Mr Arafat inside his Ramallah headquarters in the West Bank.
Activists face deportation
Israel has now declared Ramallah a closed military area and has ordered all journalists to leave.
Israeli troops fought a fierce gun battle with Mr Arafat's bodyguards on Sunday, reportedly wounding several of them.
Despite the fighting, a group of foreign pacifists defied Israeli tanks and marched into the building, vowing to act as a "human shield" around Mr Arafat.
Israeli police now say they are considering deporting the group of activists - most of whom are French.
The Palestinian leader has issued a defiant statement, telling the US Fox television network that he will never surrender.
He said on Saturday that he had the option of becoming "one of the Palestinian martyrs".