CCTV footage shared by Israeli journalists appeared to show a man cross a busy dual carriageway to attack another man waiting near a bus stop.
Searches were still ongoing in surrounding Palestinian villages on Monday evening.
It is the second murder of an Israeli citizen in the West Bank this year. On January 9, Rabbi Raziel Shevach was shot dead near his home close to the Havat Gilad outpost in the West Bank. Israeli security forces are still searching for one of his alleged killers.
On Sunday, Israel’s cabinet voted to allow Defence Minister Avigdor Lieberman to “legalise” the status of Havat Gilad.
The outpost did not have Israeli planning permission when it was built in 2002 in the West Bank, southwest of Nablus.