The Israeli prime minister called the incident a "terror attack."
According to the military, the suspects entered the village of Duma, near the city of Nablus, where they set the homes ablaze and scrawled graffiti, including "Long live the Messiah," ''revenge" and "price tag."
The attackers threw Molotov cocktails, or fire bombs, at the houses, the military said. The slain child was identified as one-and-a-half year old Ali Dawabsheh. His four-year-old brother and parents were among the wounded, according to Gassan Daghlas, a Palestinian official from the Nablus area.
The critically wounded were taken to Israeli hospitals for treatment, the military said.
"Setters in the Nablus area are very aggressive. They never stop attacking Palestinians in their villages and the Israeli government needs to put an end to these aggressions," Daghlas said.
The Israeli military said it sent troop reinforcements to the West Bank, fearing the incident could trigger unrest.
Critics say police have been slow to apprehend the assailants and Palestinians say the military has failed to protect them from attacks by militant Jewish settlers in the West Bank.
The attacks, known as "price tag," have been condemned across the Israeli political spectrum and condemnations came swiftly today, with Prime Minister Benjamin Netanyahu issuing a stern statement against the violence.
Israeli military spokesman Lt. Col. Peter Lerner called the incident "nothing short of a barbaric act of terrorism."
Israeli Defence Minister Moshe Yaalon said Israel would not allow "Jewish terrorists" to carry out such acts.
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