The arrests were made on October 5, but the investigation has been under a gag order and the motive for the killing had remained unclear.
Reuven Schmerling, 70, was found dead on Wednesday in a building he owned in the Arab Israeli city of Kafr Qasem, with media reports saying he had been either beaten or stabbed.
Schmerling lived in the nearby Israeli settlement of Elkana in the occupied West Bank.
The Shin Bet domestic security agency issued a statement on Sunday saying "evidence gathered thus far... indicates that this was a terrorist attack".
Two Palestinians from Qabatiya in the northern West Bank were arrested.
"The investigation of the suspects is ongoing. Their identities, along with other details, are under a gag order," it said.
The incident occurred as Jewish Israelis celebrate their high holidays, which have seen Israeli-Palestinian violence in the past.
The week-long Sukkot holiday began on Wednesday night.
On Tuesday, Israel announced that crossings from the West Bank and the Gaza Strip into Israel would be closed to Palestinians for 11 days over the course of the holidays.
Israel regularly bars entry to Palestinians from the West Bank and Gaza during Jewish holidays, citing security fears.
But the closure announced last week was unusual in its length.
Israeli media saw it as a reaction to a September 26 attack by a Palestinian at the entrance of a West Bank settlement in which three people were killed.
Since October 2015, unrest in Israel and the Palestinian territories has killed at least 295 Palestinians or Arab Israelis and 51 Israelis.
Seven foreigners have also been killed.
Israeli authorities say that most of the Palestinians killed were carrying out knife, gun or car-ramming attacks.
Others were shot dead in protests and clashes, while some were killed in Israeli air strikes on Gaza.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
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