The military says the suspects entered the village of Duma today where they torched the houses and scrawled Hebrew graffiti.
Forces were scouring the area searching for the suspects, the military said.
Jewish extremists have for years attacked Palestinian property, as well as mosques, churches and even Israeli military bases in opposition to what they see as the Israeli government's favorable policies toward the Palestinians. It is rare for anyone to be killed in such attacks.
Lt. Col. Peter Lerner, a military spokesman, said the incident was "nothing short of a barbaric act of terrorism." He said the military condemned the violence.