Israeli troops have made an incursion into the West Bank town of Bethlehem for the first time in about six months.
The raid follows Thursday's suicide bomb attack in Jerusalem which killed 10 people and wounded 50 others.
The suicide bomber was a Palestinian policeman from the Aida refugee camp near Bethlehem.
Witnesses said 12 Palestinians had been arrested - but the operation appeared limited and most of the troops withdrew after a few hours.
A few stayed behind to blow up the suicide bomber's house.
The Israeli army pulled out of Bethlehem last year and handed over control to the Palestinian Authority.
In violence elsewhere:
Revenge
Palestinian residents say that just before dawn on Friday, about 15 armoured vehicles moved into Bethlehem.
"The operation was launched after we made clear the Palestinians had not fulfilled their obligations to stop terror, something which was made clear in yesterday's [Thursday's] bombing," an army spokeswoman said.
Troops went to the house of Ali Munir Ja'ara, a member of the al-Aqsa Martyrs' Brigades, and told his relatives to leave before they blew the two-storey building up.
The family packed up belongings and even removed glass from window frames, Reuters news agency reported.
"Every Palestinian mother would be proud of her martyr son," his mother Fatahiya, 50, told Reuters.
Israeli forces routinely demolish houses belonging to Palestinian suicide bombers.
The al-Aqsa Martyrs Brigades, a militia loosely tied to Palestinian leader Yasser Arafat's Fatah movement, said it carried out Thursday's attack.
It said the bomber was avenging an Israeli incursion in the Gaza Strip on Wednesday in which eight people - including five of its fighters - died.
But on Friday, the largest of the Palestinian militant groups, Hamas, said it had carried out the bombing - not far from Prime Minister Ariel Sharon's residence.
Mr Sharon was not there at the time, but in an early response he cancelled a meeting with donor countries looking to ease conditions in the Palestinian territories.
The blast coincided with a complicated prisoner swap between Israel and the Lebanese militant group Hezbollah, which included the release of about 400 Palestinians.
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