Naalwa was employed at the same plant in the northern West Bank site as his two victims - Kim Levengrond Yehezkel, 28, and Ziv Hagbi, 34.
He said it appeared it was a "lone-wolf attack".
Both Prime Minister Benjamin Netanyahu and Defense Minister Avigdor Lieberman denounced the attack and said the perpetrator would be brought to justice.
Military spokesman Lt. Col. Jonathan Conricus said the preliminary finding is that a 23-year-old from a nearby village carried out a "terror attack" in the Barkan industrial zone near the settlement of Ariel before fleeing the scene.
Surveillance video from the factory after the attack showed the gunman fleeing down a flight of stairs and then running past shocked onlookers.
The assailant, the military said, had worked in a factory where the shooting took place.
Troops had searched his house and surveyed it in preparation for demolition, and detained for questioning several Palestinians suspected of assisting him, the IDF added. Na'alwa's brother was placed under arrest, while his sister was questioned and released.
The source said PA security officials believe Na'alwa would be more willing to surrender to Palestinian forces thinking they would be less eager to turn him over to Israel or out of fear that he would be killed during Israeli attempts to apprehend him.
A manager at another company in the industrial zone, Moshe Lev-Ran, suggested the attack might not have been politically motivated. "Everybody knew him. He went upstairs to the second floor because he knew who he wanted to shoot, and he shot", he was quoted as saying by the Associated Press.
On Sunday, the Palestinian Islamist group Hamas praised the attack, calling it a "message to young people of the West Bank and Gaza who are under siege".
Israel settlements are considered illegal under global law and major stumbling blocks to peace as they are built on land the Palestinians see as part of their future state. The settlements are considered illegal under global law, though Israel disputes this.