Prime Minister Benjamin Netanyahu said the Israeli had died of his wounds, making the announcement at a weekly meeting of legislators from his right-wing Likud party.
Since then, Israeli forces have been conducting a large manhunt in Jarrar's hometown of Jenin.
A general view of the Havat Gilad settlement outpost, West Bank January 10, 2018.
The young activist had become a symbol of resistance and muse for many Palestinians and humane supporters of the Palestinian cause, just like young Palestinian activist Ahed Tamimi, IsraaJabbis, who are now detained by Israeli police.
Earlier this week in response to the rabbi's murder on January 9, Israel's government in a rare move made a decision to "legalise" the rogue West Bank outpost where he lived, Havat Gilad, essentially creating a new settlement.
"Following a "complex and determined intelligence and operational effort" that began immediately after the terrorist attack in which Rabbi Raziel Shevach HY" D was murdered, Ahmad Nassar Jarrar was killed early Tuesday morning, 21 Shevat 5778 in a combined Shin Bet, IDF and Israel Police operation in Yamoun, near Jenin.
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It said a "Qassam bullet" was responsible for the murder, though it was unclear if the Hamas leadership was claiming direct responsibility for the attack or whether the cell acted on its own.
According to tally by the Palestinian news agency, Maan, Obeid was the ninth Palestinian to be killed by Israeli forces this year, four of whom were 16 years old.
Israeli forces had been hunting the final member of the cell that killed Rabbi Shevach in a drive-by shooting on January 9. According to the Israeli military, security forces surrounded the house in the village in which Jarrar was occupying and launched a missile at the building.
Also on Sunday evening, the soldiers invaded Ya'bad town, southwest of the northern West Bank city of Jenin, abducted a young man, identified as Shoaa' Walid Abu Bakr, and confiscated his motorcycle, after storming his home and searching it.
CCTV footage of Monday's attack shows Mr Ben Gal waiting on a roadside. The terrorist group Hamas "welcomed" the attack and said it was an act of resistance to US President Donald Trump's recognition of Jerusalem as the capital of Israel.
Hundreds of Palestinian residents gathered at the scene after the Israeli troops pulled out.
The Palestinians want all the settlements, built on land they claim for a future state, removed.