Suspected Jewish extremists have set fire to two Palestinian homes in a West Bank village, killing an 18-month-old boy and critically injuring at least three people.

Israeli military spokesman Lt Col Peter Lerner called the attack which killed Ali Dawabsheh "nothing short of a barbaric act of terrorism" as troops scoured the area for the suspects.

The military said the assailants entered the village of Duma, near Nablus, in the early hours, where they torched the houses and scrawled Hebrew graffiti including "Long live the Messiah" and "price tag", as the attacks are known.

Ghasan Gaghlas, a Palestinian official from the area, said Jewish settlers broke the window of a house and flung a burning object inside, "causing a quick and huge fire". He said three people were wounded aside from the child while the Israeli military said four people were hurt.

Jewish extremists have attacked Palestinian property for years, as well as mosques, churches and even Israeli military bases in opposition to what they see as the state's favourable policies towards the Palestinians and critics say police have been slow to catch the assailants. It is, however, rare for anyone to be killed in such attacks.

The latest "price tag" attack was swiftly condemned.

Israeli defence minister Moshe Yaalon said Israel would not allow "Jewish terrorists" to carry out such acts.

"We will not allow Jewish terrorists to harm the lives of Palestinians in Judea and Samaria," he said in a statement, referring to the West Bank by its biblical name.

"We will fight against them firmly and with all means and tools at our disposal."