Parents and three children aged between three months and 11 knifed to death in their West Bank home

Five members of a Jewish settler family have been murdered in their home in what police suspect was an operation by Palestinian militants.

The parents and three children, aged 11, three and three months, were attacked with knives in their house in the West Bank settlement of Itamar, near the Palestinian city of Nablus, on Friday. It is believed that two of the dead had their throats cut.

The alarm was raised by the couple's 12-year-old daughter, who had been at an event organised by a religious youth movement on the settlement and returned home to find the bloodsoaked scene. Two other children, who had been asleep at the time of the attack, were unharmed.

The area was immediately sealed off by Israeli police and soldiers as a manhunt was launched. Checkpoints were set up on the road leading to Itamar, which was declared a closed military zone. The Israeli army launched an operation in the nearby Palestinian village of Awata early on Saturday, arresting around two dozen young men.

According to an Israeli settlement security official who did not want to be named, one or two Palestinians scaled the security fence surrounding Itamar, and entered the family's home through a window. The father, he said, was a teacher in a religious school in the settlement.

The bodies of the dead were believed to be still at the house and would not be removed until the end of Shabat.

"An innocent family – a father, mother and three of their children – were murdered in the middle of the night by despicable terrorists," said Maj Gen Avi Mizrahi of the Israeli military central command, who visited the scene. "Rest assured, we are on a hunt for those responsible, and we will find them."

The prime minister, Binyamin Netanyahu, said the family had been murdered "while they were sleeping in their home on the Sabbath evening". He demanded that the Palestinian Authority assist in the manhunt. "Israel will not stand by idly after such a despicable murder," he said.

It was the first killing of settlers since four adults were shot dead in a drive-by shooting near Hebron on the eve of direct talks between Israel and the Palestinians in September. The talks stalled after three weeks following Israel's refusal to extend a freeze on settlement expansion in the West Bank and East Jerusalem, a pivotal issue for the Palestinians.

The West Bank has seen few militant operations in recent years as the Palestinian Authority has stepped up security measures as part of its efforts to build the basis of a future state. Last month, Israel removed the infamous Hawara checkpoint, close to Itamar, in an indication of improved security in the area.

But there has been continued tension between Palestinian villagers and hardline settlers, with regular skirmishes over the destruction of olive trees. Settlers have pledged to resist the evacuation of unauthorised outposts, which Netanyahu said last week would be completed by the end of this year.

Itamar, home to around 100 families, is an intensely nationalist-religious isolated settlement deep inside the West Bank. Nationalist-religious Jews believe they have a divine right to the land irrespective of legal ownership.

In Awata, Khalil Shurrab said that "many, many soldiers" had come in the early hours, going house to house to round up people suspected of involvement in the killings. Residents showed visitors spent tear gas canisters and rooms in houses that they said had been trashed by soldiers.

Hilary Minch, a volunteer with a Christian monitoring group based near Nablus, said the army had used live ammunition and stun grenades. "The next 24 hours will be very tense," she said. "The villagers fear retribution by the settlers."