The Palestinian health ministry said 28 people were shot and wounded, including one in the head, during clashes in Al-Amari camp at the entrance to the West Bank city of Ramallah.
A squad of around 25 Israeli soldiers arrived in the camp, located on the edge of the city where the Palestinian Authority has its headquarters, early on today morning.
Palestinian security sources said the army tried to arrest an official from Palestinian president Mahmud Abbas's Fatah party, who managed to escape.
Once in the streets of the camp, which is home to 15,000 Palestinians, soldiers clashed with hundreds of youths who threw stones and glass bottles. The soldiers responded by firing rubber bullets and live ammunition.
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One soldier was injured by stones and needed to be aided by colleagues, according to AFP journalists on the scene.
An army spokeswoman said "dozens of rioters hurled homemade explosives and rocks at forces", although the AFP journalists saw no explosive devices.
"Forces called on the rioters to halt the assault using riot dispersal means. Upon the continued violence, the force responded, shooting towards the main instigators," the spokeswoman added.
Palestinians followed them, blocking the main road from Ramallah to Jerusalem for about half an hour.
Later today, Israeli police said they arrested a 15-year-old Palestinian girl carrying two knifes in her bag after she approached police on the edge of the Old City of Jerusalem.
"Police units at Damascus gate arrest suspicious female terrorist with knives before carrying out attack. No injuries," police spokesman Micky Rosenfeld tweeted.
The events were the latest in more than four months of violence rocking Israel and the occupied Palestinian territories.