In a bid to halt a wave of knife, gun and car-ramming attacks since the start of October, Israeli authorities have moved to expedite the demolitions of suspects' homes, a controversial measure meant to act as a deterrent.
Clashes have erupted in the past over such demolitions, but they have rarely been as deadly as today's at the Qalandiya refugee camp, just beyond a checkpoint leading from east Jerusalem to the occupied West Bank.
A resident who gave his name as Abu Amr said he heard noises at around 2:00 AM and opened his window to check.
"There were hundreds of soldiers everywhere," he told AFP.
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"I told my children not to move. Later there was an explosion, then afterwards there was shooting (which) lasted about 30 minutes."
Israeli forces shot three Palestinians, with two confirmed dead by Palestinian hospital sources, with medics identifying them as father-of-three Ahmed al-Ayesh, 28, and Laith Manasra, 21.
Residents said those in the building were forced to leave to allow for the demolition.
The home targeted was that of Mohammed Abu Shahin, accused of shooting dead Israeli hiker Danny Gonen, 25, in June.
His wife and two daughters were living there, residents said.
Crumbled concrete was piled on the ground and onlookers arrived to view it.
Hundreds also gathered for the funeral for the two Palestinians killed nearby and dozens of stone-throwing youths clashed with Israeli forces at the checkpoint.
The brother of the alleged attacker who lived in the next building said "Israeli forces came and told my family we have to leave immediately because of a court decision to destroy (the house)."
Qalandiya camp was established in 1949 in the wake of the creation of Israel and has grown into a densely populated town with 11,000 registered refugees.