Three of those killed were members of a family on their way to visit relatives over the Jewish Sabbath, CBS News Correspondent Robert Berger reports.
An Israeli army spokesman, Olivier Rafowicz, said the gunmen had ambushed the two cars on the road near the Jewish settlement of Carmel, near the Palestinian city of Hebron, and then fled. A search was under way in the area.
The Al Aqsa Martyrs Brigades, linked to Palestinian leader Yasser Arafat's Fatah movement, claimed responsibility for the attack in a leaflet.
The shooting occurred hours after Israel sent seven tanks, a bulldozer and troops into Gaza City to demolish what it said were rocket warehouses. It was the army's first major operation since a heavily criticized bombing attack in Gaza City killed a Hamas leader and 14 other Palestinians, nine of them children.
Palestinian Labor Minister Ghassan Khatib said the settler ambush was "inevitable" following the Gaza strike and Israel's monthlong occupation of seven major towns and cities in the West Bank, which he said was impoverishing Palestinians.
"The only way to end this vicious circle of violence is when Israel will realize that force cannot bring peace and violence can only bring violence," he said.
His comments about the poverty rate were underscored by the publication of preliminary findings of malnutrition rates among Palestinian children compiled for the U.S. Agency for International Development.
According to the early figures, which were based on about a third of the total data, 30 percent of Palestinian children under the age of 6 suffered from chronic malnutrition, compared with 7 percent in a USAID survey two years ago, before the current fighting.
The study is to be released in full on Aug. 5. Preliminary findings were posted on the website of a non-governmental agency headed by Palestinian lawmaker Hanan Ashrawi.
In the attack near Hebron, initial reports suggested the gunmen may have staged a drive-by shooting, since the two cars hit were spread out about 2.5 miles along the road, their windshields punctured by gunshots.
However, Rafowicz said the gunmen were waiting on the side of the road to ambush the cars.
Israel TV said the gunmen, from the nearby Palestinian town of Yatta, had waited outside their car and opened fire on the first vehicle, killing two adults and their 15-year-old child.
They fired on the second car as it drove by, wounding the driver, who managed to keep driving for a while until he stopped and died. Three people were injured in that attack, Israel TV said.
Hospital officials in Jerusalem said one of the victims was a 12-year-old girl with moderate injuries, and the other a 2-year-old boy with slight injuries. Two people were treated for shock.
Settlers in the West Bank have been targets of dozens of deadly shooting attacks during 22 months of fighting, most recently last week, when militants ambushed an armored bus near the Jewish settlement of Emmanuel, killing nine people.
Several Palestinian groups have also vowed to seek revenge on Israel for its airstrike earlier this week on Gaza City which killed a leader of Hamas and 14 other people, nine of them children.
David Baker, an official in the office of Prime Minister Ariel Sharon, said Friday's attack was "graphic proof of the extent of Palestinian terror and how totally devoted they are to killing innocent Israeli civilians."
Rafowicz said the attack underscored the dilemma facing Israel as it continues its monthlong occupation the West Bank, increasingly under pressure to relieve the curfews it has imposed and withdraw its troops.
While the curfew was on at the time of the attack, Rafowicz said the gunmen had taken advantage of the easing of restrictions to stage the attack.
"On the one hand, we have to fight terrorism, because we're in a war, but on the other hand we have to find ways to give the Palestinian population a normal life," he said.
Hours before the attack, Israeli and Palestinian officials had said the two sides planned to meet early next week to discuss ways to ease those restrictions. It wasn't clear if Israel would go ahead with the talks.