A nine-year-old Israeli girl was out of danger in hospital Sunday after being wounded in what police said was a probable terrorist attack in a West Bank settlement.

Police said they were not ruling out the possibility of other motives for what was variously described as a shooting or a stabbing as the girl played in her garden in the Psagot settlement near Ramallah.

"It seems to be a case of a terrorist attack, although at this stage no leads have been ruled out," police spokeswoman Luba Samri told AFP.

Prime Minister Benjamin Netanyahu condemned the "hateful attack," adding that he held the Palestinian leadership responsible even though the attack took place in an area of the occupied West Bank under full Israeli control.

"As long as the incitement continues in the Palestinian official media, the Palestinian Authority cannot absolve itself of responsibility for events of this sort," he said at the start of the weekly cabinet meeting.

Police had initially said that Noam Glick was in a serious condition after being "shot in the upper part of her body."

But medics at the Jerusalem hospital where she was being treated said on Sunday that her condition was improving.

"Noam has been hospitalised in the intensive care service for children, but she is out of danger, conscious and her state is stable on Sunday morning," a spokeswoman for the Shaaret Zedek hospital told AFP.

A volunteer from Israel's Magen David Adom emergency services who treated Glick at the scene said that girl had seen an armed man before the attack.

"A man with his face hidden by a hood and carrying a weapon shot at me," Glick told the volunteer.

But Israeli media reported on Sunday that doctors treating Glick were unsure that she had been shot, suggesting her shoulder wound could have been caused by a knife.

The army said it was investigating the attack, and had initially claimed to have recovered a weapon from nearby, later clarifying the "improvised device found at the scene was not a weapon, but only resembles one."

Israeli media said the object found was a cigarette lighter shaped like a pistol.

"Security forces are continuing their search in the area to find the suspect, who fled," the army added.

Last month, an Israeli soldier was shot dead in the southern West Bank city of Hebron, in what the army believes was a Palestinian sniper attack, although no suspects have been arrested.