The arrest was made following an hours-long operations in the Jenin area of the northern West Bank on Saturday, which which continued overnight and turned deadly amid clashes with Palestinians as Israeli troops surrounded homes in the village of Burqin looking for the killer of Rabbi.
While most of Israel's settlements in occupied East Jerusalem and the West Bank are built with the government's permission, outposts are constructed without authorisation and are theoretically illegal under Israeli law, but still receive governmental support and financial assistance.
The Palestinian Ministry of Foreign and Expatriates Affairs said on Sunday that the ongoing search for the cell leader "unveils the racism, extremism and hatred prevailing within Israel's political and military institutions", the official Palestinian Authority news agency Wafa reported.
Israel, for its part, differentiates between the settlements it has approved and not.
Today, between 600,000 and 750,000 Israelis live in illegal settlements.
"We promised and the proposal to normalise Havat Gilad outpost as a regular community will be brought to the cabinet for approval this coming Sunday", Lieberman wrote on Twitter.
Earlier in the day, a 19-year-old protester was killed in clashes with IDF soldiers calling for the surrender of Ahmad Nassar Jarrar, who is suspecting of leading the cell that killed Mr Shevah, the Times of Israel reports.
Palestinian officials condemned the move.
Israel faced sharp criticism from the administration of former U.S. president Barack Obama over settlement construction, but that has not been the case with Trump's White House.
The US already considers Hamas a terrorist organisation - the group has killed hundreds of Israelis and fought three wars with Israel since taking over the Gaza Strip in 2007.
Trump's reversal of decades of USA policy enraged Palestinians, who want to create an independent state in East Jerusalem, the West Bank and the Gaza Strip.
Netanyahu said the decision wasn't meant to provoke conflict.