Fifty-year-old Sasson Nuriel vanished from his workplace last week. He is said to have worked in a sweet factory in a Jewish settlement.
A Palestinian suspect arrested in Ramallah led Israeli forces to where the body had been left.
An Israeli police statement blamed the Hamas militant group for the killing.
“This was not an abduction [for ransom] or a military operation. They came across a Jew whose only fault was being a Jew,” Internal Security Minister Gideon Ezra told army radio.
Hamas is responsible for hundreds of attacks against Israelis in recent years, including deadly suicide bombings.