Israel has accused Mr Hamed, 41, of masterminding a string of suicide bombings, including attacks on cafes and the Hebrew University in Jerusalem.
A military source said Mr Hamed was captured during an incursion into Ramallah the political capital of the Palestinian Authority early on Tuesday.
He was captured after an Israeli army unit penetrated Ramallah earlier on Tuesday, opening fire on a target not far from the home of the Palestinian leader, according to an AFP correspondent who witnessed the capture.
The leader of the Ezzedin al-Qassam Brigades in the West Bank has been on Israel's most wanted list since 1998 but has evaded capture or assassination by remaining on the move.
Ezzedin al-Qassam Brigades has been behind many bombings in the past decade and its campaign of violence was seen by the Palestinians as instrumental in prompting Israel's withdrawal from the Gaza Strip last year.
Shortly before Mr Hamed's arrest, Hamas Prime Minister Ismail Haniya said peace would prevail if Israel withdrew from all the land it captured in 1967: namely the West Bank and east Jerusalem.
Mr Haniya told the Israeli newspaper
Israel refuses to deal with the Palestinian government and is drawing up plans to retain the largest settlement blocs in the occupied West Bank while withdrawing tens of thousands of Jews from the territory.
Israeli Prime Minister Ehud Olmert is to outline the project to US President George W Bush at the White House later on Tuesday, although he is expected to try first before launching the plan to hold talks with Palestinian leader Mahmoud Abbas to reach a negotiated agreement.
A power struggle between Hamas and the Palestinian leader's Fatah movement has spilled over into deadly clashes, however, and underscored Mr Abbas's weakness, bolstering claims that such talks will bear little fruit.
Hamas won a shock victory in January's Palestinian elections but has since been largely boycotted by the West over its refusal to recognise Israel or renounce violence.