Palestinian president Mahmud Abbas condemned the "barbaric act" and vowed measures in response.
Ziad Abu Ein, who was in charge of the issue of Israeli settlements for the Palestinian Authority (PA), "was martyred after being beaten in the chest," said Ahmed Bitawi, the director of the Ramallah hospital.
A Palestinian security source told AFP that Israeli forces beat Abu Ein with the butts of their rifles and their helmets during a protest march in the village of Turmus Ayya near Ramallah.
Three soldiers grabbed Abu Ein and hit him in the chest, the photographer said. Abu Ein fell and an Israeli army doctor rushed to treat him before he was evacuated to hospital.
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Another witness, Kamal Abu Safaka, said that Abu Ein was "beaten by a soldier" in the chest "after having a conversation with the officer in charge."
The Israeli army had no immediate comment.
Abbas condemned "the brutal assault that led to the martyrdom" of Abu Ein, calling it "a barbaric act that cannot be tolerated or accepted," official Palestinian news agency WAFA said.
The Islamist movement Hamas, the de facto rulers in the Gaza Strip, issued a statement mourning Abu Eid's death and calling on the PA to cease security coordination with Israel.
"The time has come to rally all our forces in facing the criminal Zionist occupation and stop all sorts of security coordination with the occupation," it said in a statement.
Abu Ein, 55, has previously been arrested and imprisoned by Israel.
He was extradited from the United States in 1981 over the murder of two Israelis in Tiberias in 1979, and sentenced to life in prison, but released in 1985 in a prisoner exchange.