Israel's deputy Defence Minister, Ephraim Sneh, said the ransacking cast a dark shadow over the credibility of the Palestinian leader, Yasser Arafat.
Crowds of civilians and masked gunmen surged into the compound known as Joseph's Tomb despite appeals by Palestinian leaders for all civilians to leave the site - one of the main flashpoints in the past week's violence.
The activists raised the Palestian flag and burnt Jewish books and furniture, while giggling children emerged, wearing hats and flak jackets left behind by the Israelis.
Israel's deputy Defence Minister, Ephraim Sneh, said the ransacking cast a dark shadow over the credibility of the Palestinian leader, Yasser Arafat.
He said it called into question who was in charge in the West Bank.
An Israeli army statement said earlier that responsibility for guarding the tomb had been handed over to the Palestinian authorities because both sides wanted to defuse tension.
The 12 border guards were pulled out helicopter early on Friday. The army said one of its soldiers was shot and wounded during the withdrawal.
Palestinian triumph
Palestinian police later forced the demonstraters to leave, but the Palestians were still jubilant over the Israeli departure.
"We consider this a big victory," said Ali Farraj, a local Palestinian leader."It cost us a lot of blood and we feel proud of this victory".
"It's like getting rid of a bone stuck in your throat," said a Palestinian security officer.
Observers say this is first time that Palestinian violence has directly caused Israeli troops to relinquish an outpost.
The withdrawal follows another day of violent clashes in which at least eight Palestinians were shot dead by Israeli forces, bring the number of Palestinian deaths since 28 September to nearly 80.
Prime Minister Ehud Barak on Friday defended Israel's right to use force to defend itself after Israeli police stormed the site of the Aqsa mosque in Jerusalem to disperse hundreds of Palestinians who had been attacking police with stones and petrol bombs.
"With the same determination we had in leaving no stone unturned to find a way toward peace, with the same determination... we will fight and defend our soldiers and our citizens, even if it is against the whole world," he told Israeli TV.