Israeli troops entered the West Bank town of Ramallah early on Monday, but the army denied reports that soldiers had entered Yasser Arafat's compound and completed destruction of buildings hit in an earlier operation.
One Palestinian was killed and two wounded during exchanges of fire, Palestinian doctors said.
The army said two soldiers were also wounded.
The Israeli military said soldiers surrounded Arafat's compound to prevent gunmen from entering but did not enter themselves.
Palestinians officials also said the Israeli forces remained outside the compound.
Arafat was inside the compound and was unharmed, the officials said.
Troops moved into the West Bank town hours after the Palestinian leader named a new, streamlined cabinet and hours before Israeli Prime Minister Ariel Sharon was to meet U-S President George W Bush in Washington.
The latest incursion began around 0400 local time (0100 GMT) when tanks, armoured personnel carriers, jeeps and infantry on foot entered the town.
Soldiers moved among houses around the Amari refugee camp, next to Ramallah, and into the suburb of Beituniyah.
Israeli military sources said the purpose of the latest incursion into the West Bank town was to arrest terrorist suspects.
They said the troops would remain in Ramallah for a "limited time" and had arrested about a dozen suspects overnight, witnesses said.
Also, soldiers detained several suspects in night time raids in other parts of the West Bank, the statement said.