Walid Sbeh, of the al-Aqsa Martyrs Brigade, was killed in his car as he left the village of El Khader, next to Bethlehem, Palestinian sources told the AP news agency.
Soldiers opened fire from an army base on a nearby hill, they said. The Israeli military had no immediate comment.
Israel Radio reported that Sbeh, 30, was involved in organising suicide bomb attacks in Israel.
The al-Aqsa Martyrs Brigades is associated with Palestinian leader Yasser Arafat's Fatah movement and has admitted being behind a number of suicide attacks against Israelis.
Over the past year and a half Israeli forces have killed a number of Palestinian militants in what have been described as targeted killings.
The Israelis say the killings are pre-emptive strikes to forestall terror attacks.
Israelis traumatised
Earlier on Monday, a Palestinian blew himself up in a suicide attack near an Israeli border patrol unit.
The man set off the explosives he was carrying when border guards confronted him, close to Israel's border with the northern West Bank.
No-one else was hurt in the attack which came as Israel continued building a controversial new security fence to try to stop Palestinian militants crossing into its territory.
The suicide attack occurred near the Arab-Israeli village of Kafr Salem, where work on the fence started on Sunday.
Mr Arafat has described the construction of the fence as "racist".
Meanwhile, Israeli armoured vehicles rolled into the West Bank town of Jenin on Monday night, according to the French news agency AFP, less than a day after a previous incursion.
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