Natsheh was killed during exchanges of fire with IDF forces in the West Bank city of Hebron early Sunday. There were injuries among the forces.
The IDF stated that the forces encircled a building in Hebron where wanted Hamas members were hiding. The gunmen refused to surrender and exchanges of fire erupted in the area.
During the incident, blasts were heard in the building as a result of explosive devices kept inside.
Natsheh was the man who prepared the demolition charge used to carry out the Dimona suicide bombing. The soldiers also arrested his assistant, Wal Bitar, and another Hamas member, Abe Abu-Aisha.
Palestinian sources said the Israeli soldiers eventually bulldozed the house hours later when the man refused to surrender. His badly mauled body was seen being removed from the rubble.
Prime Minister Ehud Olmert praised the security forces' operation in Hebron at the start of Sunday's cabinet meeting.
"Naturally, we won't go into details here, but it was a very successful operation," he said. He sent the government's gratitude to the security services and members of the Israel police's special units who took part in the operation.
Hamas's armed wing, the Izz al-Din al-Qassam Brigades, vowed to avenge Natsheh's killing. "Our response will be swift and painful," the group said in a statement.
The attack engineered by Natsheh took place on February 4, when a suicide bomber arrived at a commercial center in the southern city of Dimona. The terrorist detonated himself, murdering 73-year-old Liuvov Razdolskiya and injuring 10 people.
A police officer who was in the area, Supeintendent Kobi Mor, shot and killed another terrorist before the latter managed to detonate the explosives he was carrying. Sappers detonated this explosive device in a controlled manner.
'We're happy, but it's no comfort'
Liuvov Razdolsky's family received the news on Natsheh's assassination with mixed feelings. "We hoped such a thing would happen," her son, Professor Michael Gedalin, told Ynet.
"We have already heard of similar operations carried out by the army in the past, and believe that one day the person responsible for my mother's death would be assassinated," Gedalin added. "I'm glad he was assassinated, but it's no comfort to me. My mother is already gone."
Gedalin added that the condition of his father, Edward Gedalin, who was seriously injured in the attack, has improved, but that he had yet to return to fully function. The father has remained at home since being released from hospital several months ago.
"We don’t talk much about the attack," Michael Gedalin said. "My father hardly ever talks about that day and about the fact that my mother is gone. These are wounds which will never heal."
Dimona Mayor Meir Cohen also welcomed the assassination of the man responsible for the terror attack in his city.
"I am glad the IDF's long arm reached this despicable criminal as well. It's the only way to deal with such people, and the sooner the better," said Cohen.
Truce in Gaza, activity in West Bank
Despite the ceasefire in the Gaza Strip, the IDF continues to operate extensively in the West Bank. During a detention operation last month, an IDF force spotted and fired at three Palestinians hurling Molotov cocktails at Highway 60 in the West Bank, north of Hebron.
The Palestinian news agency, Wafa, reported that a 17-year-old boy was killed in the incident during a violent clash with IDF soldiers. The teenager, identified as Muhammad Anwar Abu Sarakh, was reportedly shot in the head.
Earlier that week, a senior commander of the Islamic Jihad and an additional member of the group were killed in the West Bank city of Nablus in an exchange of fire with IDF and Shin Bet forces who had entered the city to arrest several wanted Palestinians.
Troops belonging to the elite Duvdevan unit were operating in the city's Rafidiyah neighborhood, in pursuit of 25-year-old Tariq Abu Ra'ali from Jenin.
Attila Somfalvi, Yonat Atlas, Reuters and The Associated Press contributed to this report