The International Solidarity Movement (ISM) identified the man injured as Tristan Anderson, 37, of California. He was rushed to the Chaim Sheba Medical Center at Tel Hashomer for medical treatment.
The Israel Defense Forces Spokesperson's Office confirmed the report, adding that the incident was being looked into.
The army also said that some 400 left wing Israeli, Palestinian and foreign activists had arrived at the area while violating a closed military area order, and that some of them, who were veiled, had hurled stones at the security forces, who responded with crowd dispersal means.
Ulrika Jenson, a Swedish left-wing activist who was at the rally, said that "the IDF soldier stood on the hill and watched the protestors. They fired tear gas canisters at us. Anderson was hit by one of the canisters and collapsed on the floor, with a big hole in the middle of his forehead. I tried to stop the blood until the ambulance got there, but it was nearly impossible."
'There was no reason to fire at them'
Jonathan Polack, a left-wing activist who is sitting by Anderson's bedside at the hospital, said that the American man was unconscious and expected to undergo surgery in his head in the coming hours.
Polack also said that the protestors clashed with the soldiers, but noted that "the firing incident took place inside the village and not next to the fence. There were clashed in the earlier hours, but he wasn't part of them. He didn't throw stones and wasn’t standing next to the stone throwers.
"There was really no reason to fire at them. The Dutch girl standing next to him was not hurt. It only injured him, like a bullet."
Last Friday saw four people lightly injured in Naalin. According to Palestinian sources, the four were hurt during the weekly protest against the separation fence's route. The demonstrators managed to reach the work area and caused damage to part of the fence being built in the area.
IDF soldiers and Border Guard officers responded with crowd dispersal means. According to the Palestinians, they also used live ammunition against the protestors. The IDF said that the demonstrators had hurled stones at the security forces and that those injured were the rally's leaders.
The Palestinians claimed that a 10-year-old child was injured in his back, and that a Swedish demonstrator was hit by a tear gas canister which hit her directly in the stomach.
Ali Waked, Efrat Weiss, Liron Sinay and Meital Yasur-Beit Or contributed to this report