The attack came hours after security forces killed two Palestinians, with fears of wider unrest.
In another incident, a Palestinian stabbed two Israeli border police in Jerusalem’s Old City before being shot dead, in the bloodiest 24 hours to hit the West Bank and Jerusalem in months.
The Israeli army said a Palestinian exited his car at a bus stop near the settlement of Givat Asaf in the West Bank before opening fire on soldiers and civilians.
Two soldiers were killed and at least two other people — including another soldier — were wounded, the army said, with the attacker fleeing.
An AFP photographer saw two men who appeared to be soldiers lying on the ground, before their bodies were covered up.
“We are searching for the terrorist. We will find him,” the military said on Twitter.
Following the attack, the army circled the nearby city of Ramallah, home to Palestinian president Mahmud Abbas.
Entrances and exits to the city were sealed and the army entered multiple neighborhoods, AFP correspondents said.
Clashes broke out in multiple spots.
The shooting came only hours after Israeli forces killed two Palestinians allegedly responsible for West Bank attacks that claimed the lives of three Israelis, including a baby.
One of them was Salah Barghouti, a 29-year-old accused of shooting seven Israelis on Sunday, also at a bus stop near the Ofra settlement.
The Shin Bet Israeli internal security service said that other members of Barghouti’s group, all of them affiliated with Hamas, had been arrested overnight.
A woman who was seven months pregnant was among those wounded in that attack.
Doctors tried to save her baby boy with an emergency caesarean but he died on Wednesday and was laid to rest in Jerusalem.
The mother remains in hospital in a serious condition.
The other Palestinian killed by Israeli forces on Wednesday night had been suspected of shooting dead two Israelis in October.
Ashraf Naalwa, 23, was killed when forces tried to arrest him near Nablus in the West Bank, Israel’s Shin Bet security service said.
The house near Nablus where Naalwa was found was peppered with bullet holes after the raid, an AFP journalist at the scene said.
On October 7, Naalwa allegedly shot and killed 28-year-old Kim Yehezhel and 35-year-old Ziv Hagbi in the Barkan industrial zone settlement.
The two Israelis were employees of the recycling company where Naalwa worked.
A separate incident on Thursday morning saw a man stab two border police in Jerusalem’s Old City before being shot dead.
There were no immediate details on the identity of the assailant.
The violence came amid heightened tensions in the West Bank, with a former head of Shin Bet’s intelligence and research division saying it appeared to be a “new front” opened by Hamas.
“It is a part of the new initiative of (Hamas) that decided to open a new front in the West Bank after a period of time that they got to the conclusion they will ease down their efforts from the Gaza Strip,” Barak Ben-Zur said.
Since Sunday’s attack, Israeli forces have made a series of incursions into central Ramallah, where Abbas’s Palestinian Authority is based.
Hebrew posters have been pasted in the West Bank over the past week inciting the killing of Abbas.
Israel seized control of the West Bank and east Jerusalem in a 1967 war.
Around 600,000 Israelis now live in settlements there considered illegal by the international community.
Many Palestinians consider violence against Israelis in the West Bank a justified response to the growth of settlements on land they see as theirs.
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