Shay Retter, the head of Har Adar's security committee, said that between 100 and 150 Palestinian labourers typically enter the community each day for work.
Israeli police said the terrorist opened fire on a group of Israeli security officers who were patrolling the back path to the settlement.
During that same time, Israeli forces have killed over 255 Palestinians; Israel says majority were attackers, others died in clashes with Israeli forces.
Challenged to halt, the Palestinian "opened his shirt, drew a pistol and fired at the security staff and troopers at close range", said the police spokeswoman.
After opening fire and killing three men, he was shot dead by other forces at the scene.
The wounded Israeli is in a serious condition and is being treated at the Hadassah hospital in Jerusalem.
Since September 2015, violent clashes between Palestinians and Israelis have claimed the lives of at least 293 Palestinians, 48 Jewish Israelis, two US nationals, a British tourist and two African asylum seekers. Paramedics are treating 4 seriously wounded people for gunshot and knife wounds. The Palestinian leadership has blamed frustration rooted in decades of Israeli occupation. The resolution marked a striking rupture with past practice by President Barack Obama, who had the USA abstain rather than veto the measure as then president-elect Donald Trump demanded.