Three Arabs in a car opened fire on the group after the Israelis' vehicle broke down near the town of el-Bireh, the settlers' spokesman, Shai Bazak, said. Shalva Uzana, 24, from Jerusalem, died.
The armed wing of the Islamic Resistance Movement (Hamas) said it carried out the attack to avenge the army's killing last week of its leader, Imad Akel. In Damascus, the radical Democratic Front for the Liberation of Palestine also claimed responsibility.
Both groups have vowed to torpedo the Israeli-PLO deal for autonomy in Gaza and Jericho, which calls for the army's withdrawal from 13 December.
Mr Bazak, spokesman for the Council of Jewish Communities in Judea, Samaria (West Bank) and Gaza, said settlers would block roads around settlements in the occupied territories today in protest at the attack.
In the Gaza Strip, Palestinians protested against the Israel-PLO plan but clashes between Palestinians and the Israeli army dropped as both sides kept their distance. The Israeli army declared the entire Gaza Strip a closed area.
Hundreds of Palestinians marched through the town of Rafah in southern Gaza to demand that the peace talks be suspended until the Israelis release Taiseer Burdeini, a leader in Rafah of the Fatah Hawks, the armed wing of Fatah, the mainstream faction of the Palestine Liberation Organisation.
Hisham Judeh, the leader of the Fatah Hawks, was looking downcast and humiliated yesterday. Mr Judeh was at the top of Israel's list of most-wanted men until recently but now he sat without a gun, shamefaced as his old associates toyed with ammunition at a safe house in Rafah refugee camp.
Two weeks ago, Mr Judeh was ordered by Yasser Arafat to accept an offer from Israel of an amnesty to any Hawks who handed themselves in. He was loath to accept the truce, but the PLO leadership, who had already ordered an end to Palestinian attacks on Israelis, were eager to prove to Israel that the PLO's 'armed struggle' was over.
'I thought about it for five days. In the end I did it because I thought it would mean amnesty for all the Hawks,' he said. Now he feels cheated and betrayed. 'I am criticised by my own people. And I feel unsafe.'
On Sunday, Imad Abu Reesh, another Fatah Hawk, who had agreed to accept the amnesty, was killed by Israeli soldiers - apparently mistakenly - in a shoot-out. And then Taiseer Burdeini was arrested on Monday. As a result, the Fatah gunmen of the Gaza Strip have taken up arms again. Mr Judeh will not say whether he plans to join them.
The Hawks say Israel has breached the deal, and out of pride they could clearly not sit back and watch their people killed, while the gunmen of Hamas continued their 'operations' against Israeli targets, gaining support in the streets.
'We have been forced to carry on the military struggle again,' says Khaled Tawfish, 21, another wanted man. 'We still support the peace agreement. But we have to protect ourselves.'
This sudden renewed militancy of the Fatah gunmen may only be a final show of strength as the difficult process of implementing the peace process begins. These hunted youths know their days as the street rulers are probably coming to an end, to be replaced by another 'negotiated' form of law and order.
Perhaps their marches through the refugee camp yesterday were just a plea for final recognition of their past struggle before it is consigned to history.
The words of the Hawks are, never the less, being taken seriously by both Mr Arafat and Yitzhak Rabin, the Israeli Prime Minister. Both sides know that violence from extremists on either side has the potential to overturn the delicate peace deal and fuel opposition.
The defiance of the gunmen has won widespread support among the Palestinians of Gaza. Renewed tension has also exposed the continued lack of firm political control over the Palestinian streets, with Israeli withdrawal now just round the corner.
For Mr Arafat, the Hawks' declaration to fight on is in direct defiance of his instructions to lay down arms, and raises serious questions about his authority among his own Fatah supporters in Gaza.
Mr Rabin has displayed concern about the renewed tension in Gaza, appearing to realise that Israel may have provoked the Hawks' action. He admitted this week that the killing of Abu Reesh may have created a 'quagmire'. On Tuesday, Matan Vilnay, head of Israel's Southern Command, in charge of Gaza, met the local Fatah leaders and found himself listening to demands.
Leading article, page 19