A Palestinian gunman opened fire at a group of Israelis in a settlement in the occupied West Bank on Tuesday, wounding six people before being shot dead, police said.

"A terrorist opened fire at a group of people in Maaleh Adumim," a police statement said, referring to a Jewish settlement in the West Bank.

"The terrorist was neutralised by an off-duty border police officer."

Police later confirmed to AFP that the gunman was shot dead.

The Palestinian health ministry confirmed that the assailant, Muhannad Mohammad al-Mazaraah, 20, was killed by "occupation bullets".

Two hospitals in Jerusalem said they were treating six people including a teenager wounded in the attack, two of whom were in a serious condition.

The off-duty officer who shot the gunman said he was in a barbershop when he heard shots and shouting, and rushed outside and saw the assailant.

He said he saw a man wearing a yellow vest and holding a pistol.

"I wasn't sure he was the terrorist," the officer, whose identity was not revealed, said in a video released by police.

"I yelled at him to stop and cocked my gun. He began firing at me, and I realised he was the terrorist."

Police said the officer then managed to shoot the gunman dead in return fire.

Israel has occupied the West Bank since the Six-Day War of 1967.

Since early last year, the territory has seen a string of attacks by Palestinians on Israeli targets, as well as violence by Israeli settlers against Palestinian communities.

Violence linked to the Israeli-Palestinian conflict has so far this year killed at least 204 Palestinians, 27 Israelis, one Ukrainian and one Italian, according to an AFP tally compiled from official sources on both sides.

They include, on the Palestinian side, combatants as well as civilians and, on the Israeli side, three members of the Arab minority.

Excluding Israeli-annexed east Jerusalem, the West Bank is home to nearly three million Palestinians, as well as around 490,000 Israelis who live in settlements considered illegal under international law.