The July 31 attack in the village of Duma led to angry Palestinian protests and an international outcry over Israel's failure to curb violence by hardline Jewish settlers.
Saad Dawabsha died in hospital in the southern Israeli city of Beersheba where he was being treated for third-degree burns for the past eight days, Palestinian official Ghassan Daghlas said.
The head of the hospital's intensive care unit said his prospects had been slim from the outset.
"With burns covering 80 percent of the body, chances of survival are very, very slim, almost zero," he said.
Also Read
"He underwent a number of skin grafts but, despite everything, his vital systems collapsed."
Dawabsha's wife Riham and four-year-old son Ahmed are still fighting for their lives in another Israeli hospital, near Tel Aviv, after the attack that killed 18-month-old Ali.
However, a doctor said Ahmed was showing some encouraging signs.
"He is conscious at the moment, communicating with relatives," Marina Rubinstein told the radio.
"His condition is still serious," she added. "He faces a large number of operations and a very long period of hospitalisation."
The Dawabsha family's small brick and cement home was gutted by the fire, and a Jewish Star of David spray-painted on a wall along with the words "revenge" and "long live the Messiah".
"Nothing will stop these murderous settler attacks and... we cannot wait until they come into our villages and our homes," Hossam Badran, spokesman of the Palestinian Islamic movement Hamas, wrote on Facebook from his base in Qatar Saturday.