Palestinian medics said Issa Qatari, 22, was shot in the chest and died shortly before reaching hospital.
The Israeli military said its forces had clashed with dozens of protesters after entering the al-Amari camp on Wednesday to arrest a Hamas operative.
“A main instigator attempted to hurl an explosive device” at the troops, who opened fire in response, it added.
Witnesses in the camp gave a similar account of the incident.
Protesters “showered the invading forces with stones, and soldiers responded with live ammunition, injuring a number of other Palestinians”, one told the Maan news agency.
The Israeli military said the Hamas operative was arrested in the raid.