It was the second such fatality within three days involving a former Palestinian inmate freed during a ceasefire in the Gaza war.
"Two men, aged 18 and 20, were killed and seven people were wounded, one of them seriously, in Balata" refugee camp in Nablus, the Palestinian health ministry said in a statement.
Wael Misha, 18, was one of 240 Palestinian prisoners released from Israeli jails in November in exchange for 105 hostages held in Gaza, the Palestinian Prisoners' Club watchdog told AFP.
The exchange took place during the week-long November ceasefire between Israel and Hamas, which have been at war in the Palestinian territory since October 7.
The official Palestinian news agency, Wafa, said a woman and a child were among those wounded in Balata on Thursday, describing the incident as a "drone strike".
The Israeli military said two armed militants were killed in a strike.
"An Israeli air force aircraft attacked and eliminated two armed militants who posed a threat to the forces operating in the area" of Nablus, the military said in a statement.
It said the strike came as the army and police were securing access for worshippers to Joseph's tomb in Nablus during the night.
Jews believe the tomb is the burial site of the biblical patriarch Joseph, while Muslims consider it the burial place of a Muslim religious figure.
Earlier this week, the Palestinian Prisoners' Club said Israeli forces killed another Palestinian who had been released during the November ceasefire.
Tariq Ziad Abdul Rahim Daoud, 18, was shot dead in the town of Azzun, east of Qalqilya, the military said, after he allegedly fired at an Israeli citizen.
Violence in the West Bank, a Palestinian territory occupied by Israel since 1967 and separate geographically from the Gaza Strip by Israeli territory, has surged since the start of the Gaza war on October 7.
At least 632 Palestinians have been killed in the West Bank by the Israeli army or settlers, according to an AFP count based on official Palestinian data.
During the same period, at least 18 Israelis, including soldiers, have been killed in the West Bank in Palestinian attacks, according to official Israeli data.
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