The Palestinian health ministry identified them as Jihad Mohammad al-Shami (24), Odai Othman al-Shami (22), and Mohamed Raed Dbeik (18).
The Nablus-based Lions' Den armed group said in a statement the three were setting up an ambush for Israeli troops in Sarra town, southwest of the city.
While there, they spotted soldiers from the elite Golani Brigade infantry unit and exchanged fire with them.
All three were killed in the firefight, and a fourth man who was reportedly with them was arrested.
The Israeli military said in a statement that Golani troops were stationed in the area for a "proactive activity" when they came under attack and returned fire. There were no Israeli casualties, the military added.
The car and bodies of the three men were withheld by the Israeli army, according to Palestinian media.
Tensions have been high in Israel and Palestine in recent months as Israeli attacks in the West Bank intensify and Palestinian resistance grows.
The Sunday shoot-out brings the death toll of Palestinians killed by Israelis this year to at least 81, including 15 children, which corresponds to a rate of nearly one killing every day.
It's the bloodiest start to a year since 2000, according to the Palestinian health ministry.
On Friday, two Palestinians were killed in separate incidents in Qalqilya, west of Nablus, one shot dead by a settler and the other, a 16-year-old boy, killed by a soldier.
A Palestinian man from the West Bank opened fire a day earlier on a busy Tel Aviv street and wounded three people, two of them were left in critical condition.
Palestinian have killed at least 13 Israelis this year.
Fears are growing ahead of April, when Passover, Easter and Ramadan all overlap, that a wider outbreak of violence could flare.
CIA director William Burns recently said current tensions bear an "unhappy resemblance" to the Second Intifada, referring to about five years of heightened conflict dating from the start of this century.