The gunmen entered a family's home while they were celebrating the sabbath and opened fire, killing a husband and wife, the army said. It was unclear who killed the gunmen, one of whom was wearing an explosives belt, the army said.
The military wing of Hamas claimed responsibility for the settlement attack and in a statement promised more attacks in retaliation for Israeli occupation of the West Bank and Gaza. The group also took responsibility for Wednesday's suicide bombing in northern Haifa that killed 15.
"This retaliation is the beginning of a series of attacks," said the Hamas statement, faxed to The Associated Press office in Jordan.
There is a heavy military presence around the Kiryat Arba settlement, which is near the West Bank city of Hebron. It is considered a hardline settlement and has often been the target of Palestinian attacks. The last attack came Jan. 23 when gunmen opened fire, killing three Israelis.
In a separate clash Friday night in the nearby Jewish settlement of Nahal Negohot, soldiers said they shot and killed two Palestinian gunmen who tried to infiltrate the settlement. One of the gunmen was wearing an explosives belt, which blew up. There were no Israeli casualties.
Palestinians view Jewish settlers as legitimate targets in their struggle for independence and often target settlers and their towns.
"Palestinian terrorists continue to attack on the holiest day of the Jewish week," said David Baker, a government spokesman.
The attack comes a week after Israeli Prime Minister Ariel Sharon's new hardline government was sworn in, promising stepped up strikes against Palestinian militants and settlement development.
"This retaliation is the beginning of a series of attacks," said the Hamas statement, faxed to The Associated Press' office in Jordan.
Earlier Friday, Israeli troops seized a chunk of the northern Gaza Strip and set up key positions there in what an army commander said would be an open-ended stay to try to stop rocket attacks on nearby Israeli towns.
"Our aim is to try and prevent the terrorists from organizing themselves and getting into Israel," said government spokesman Avi Pazner.
CBS News Correspondent Robert Berger reports about 100 Israeli tanks and armored vehicles moved into northern Gaza, near a refugee camp where 11 Palestinians were killed the day before in an army raid. The forces took control of four square miles, lined by two Palestinian towns and a refugee camp, carving out what Israeli military reporters said was a new "security zone." It was the first sizeable reoccupation of a Gaza residential area in 29 months of fighting. In the past, troops have staged quick incursions.
"This action is a little different than the actions we have carried out until now," said an army commander, Col. Yoel Strick. "If we decide it is necessary, we will hold on to this area for the foreseeable future."
In other developments, Mahmoud Abbas — tapped by Yasser Arafat as the new Palestinian prime minister — said Friday it is too early to respond to the offer. "I will be able to respond negatively or positively to President Arafat's proposal when it becomes clear what kind of authorities the prime minister will have," Abbas, known as Abu Mazen, told The Associated Press.
International Mideast mediators have pressured Arafat to create the position to make him share power and reform the Palestinian government.
The choice of Abbas could signal that Arafat has given up on the idea of appointing a weak, nonpolitical premier, something he was considering earlier. Abbas has a strong political following and is known as a moderate. He has publicly called the violent Palestinian uprising a mistake and urges a return to peace negotiations with Israel.
Israeli analyst Martin Sherman of the of the Institute of Policy and Strategy in Herzliya, a suburb of Tel Aviv, doubts that Abbas will be able to influence or control Palestinian terror groups and especially Islamic militants.
"I'm very skeptical whether changes in personalities here will make any difference," he said.
The PLO's Central Council will meet this weekend to approve the idea of creating the position, and the Palestinian legislature will convene next week to define the responsibilities of a prime minister.
Palestinian officials are concerned that no one is paying attention to their plight.
"We urge President Bush and Prime Minister Blair to shift a few seconds of their focus on the war in Iraq to helping Palestinians and Israelis break this vicious cycle," said Palestinian Cabinet Minister Saeb Erekat.
The Israeli military's Gaza operation is aimed at keeping Palestinian militants from firing small homemade Qassam rockets at Israeli villages and towns just across the fence, the army said.
Troops took up positions in a triangle formed by the towns of Beit Hanoun and Beit Lahia and the refugee camp of Jabalya in northern Gaza, an area covering about four square miles, said the Palestinian police chief in Gaza, Brig. Gen. Abdel Razak Majaida.
Of that area, 1.43 square miles are actually occupied by Israeli troops, while the remainder is within the sights of Israeli tanks, he said. About 6,000 Palestinians live in that area.
In Beit Lahia, which is closest to the border fence with Israel, 40 tanks and military vehicles were parked on a sandy hill overlooking much of the area. Troops took over a former Palestinian police base and an elementary school, witnesses said. It was not immediately clear whether those living in the zone would face restrictions in movement.
Israeli snipers took up spots on several rooftops. Bulldozers cleared orchard trees and farm land that the military said provided cover for Palestinians firing rockets.
Several Palestinian gunmen gathered at the edge of Jabalya, the largest and most heavily armed Palestinian shantytown, home to about 110,000 Palestinians. Two youths, among a group hurling rocks at tanks, were wounded by army fire, doctors said.
As the crackle of gunfire echoed, a few construction workers continued to build at the nearby housing project. An elderly Bedouin man angrily blamed those firing the rockets for drawing Israel's military might.
On Thursday, several Qassam rockets were fired from Jabalya toward the Israeli border town of Sderot, causing no damage or injuries. The rocket fire was a response to an Israeli sweep through Jabalya earlier in the day that left 11 Palestinians dead and more than 140 wounded.
The raid, in turn, came a day after a Hamas militant blew himself up on an Israeli bus in the northern port city of Haifa, killing 14 Israelis and an American teen.
Abdel Aziz Rantisi, a Hamas leader, led 3,000 supporters in a march through Jabalya on Friday and said Hamas would fight the Israeli troops. "This war is going to end with the end of the occupation," he said.
The seizing of parts of northern Gaza marked a growing escalation in the strip that began Feb. 15, when Hamas blew up a tank in the area, killing four Israeli soldiers. Dozens of Palestinians have been killed in Israeli incursions since then.
In response, Palestinians have been firing primitive, homemade Qassam rockets. Most miss their target, and those that land cause little damage with their small warheads. No one has been seriously injured by a Qassam rocket, but Israel's government says it is determined to stop the rocket fire, even if large-scale military operations lead to heavy casualties.
Israel complains that Arafat's security forces in Gaza are doing little to prevent the rocket fire. Palestinians counter that the Israeli operations inflame passions and perpetuate the violence.