Authorities identified the victims as 29-year-old Kim Levengrond Yehezkel and 35-year-old Ziv Hajbi. Closed-circuit footage from the scene showed a man holding a handgun and wearing a backpack, fleeing down a flight of stairs and then dashing past stunned onlookers.
Israeli Defence Minister Avigdor Lieberman said the Israeli army and police are searching for the shooter.
The assailant, the military said, had worked in a factory where the shooting took place.
"Shooting her at close range and killing her, he turned to a second female in her 50s, who had entered to investigate unusual noises in the office, and shot her in the stomach".
He shot another woman in the stomach, moderately wounding her. The Palestinian economy is heavily restricted under Israeli military rule, forcing tens of thousands of Palestinians to seek work in Israel as well as Jewish settlements.
The perpetrator has so far managed to evade capture, but several arrests were conducted in relation to the affair. They reportedly include Mr Naalwa's brother and sister.
"This was a very severe terrorist attack in which two Israelis were brutally murdered and a citizen was also wounded", Netanyahu said.
The Palestinian Islamic Jihad militant group issued a similar statement. The worker, who carried a gun, fired back a shot at the gunman, but apparently missed. "Everybody knew him. He went upstairs to the second floor because he knew who he wanted to shoot, and he shot", he was quoted as saying by the Associated Press.
Most countries consider settlements that Israel has built on land occupied in the 1967 Middle East war as illegal. The settlements are considered illegal under global law, though Israel disputes this.
On the relationship with the United States, the PLO official said all political and diplomatic relations between them have been cut off since the USA chose to recognize Jerusalem as Israel's capital in December and move its embassy to the city and then close the PLO office in Washington, with the exception of the security cooperation agreement, which is now under review and may also be terminated in the near future, and Palestine's commitment not to join worldwide organizations and institutions, which the PLO is no more bound to. Israel has come under harsh condemnation over the past several years for its response to attacks committed by Palestinians on Israelis, which rights groups have said amounted to "collective punishment" on family members and entire communities in a clear violation of global law.
As the many recent Palestinian teenage terrorists, murderer Ashraf Walid Suleiman Na'alwa has also grown up being brainwashed by the P.A. and its educational system that murdering Israelis is "heroic".