JERUSALEM (AP) _ Palestinians shot off firecrackers and flew balloons in the occupied lands today to celebrate their annual ''Independence Day.'' Troops shot and killed an armed Palestinian the army said was wanted as a vigilante.

Palestinians in the West Bank and Gaza Strip have celebrated their so- called Independence Day since Nov. 15, 1988, when the Palestine National Council declared the formation of an independent Palestinian state.

The council, which is the Palestinians' parliament in exile, made the move after Jordan's King Hussein withdrew claim to the West Bank, which Jordan lost to Israel in the 1967 Middle East war.

This year's festivities began a day early, apparently to forestall possible military curfews aimed at dampening nationalist passions.

In Gaza City, Palestinian flags fluttered from rooftops, cars honked and people flew balloons.

Wall slogans read ''Yes to the independent Palestinian state'' and ''Yes to the peace conference'' - referring to the conference on Oct. 30 in Madrid, Spain, that brought Israeli and Palestinian negotiators together as equals for the first time.

In Bethlehem, students decorated their classrooms with balloons and Palestinian flags, and loudspeakers broadcast speeches by different political factions.

Hamas, the Muslim fundamentalist underground that opposes the U.S.-mediated peace process, denounced the new conciliatory trend among Palestinians.

''How can we give olive branches to criminal Jewish hands that have uprooted thousands of olive trees? Why the dancing? ... Why the marches of peace?'' Hamas asked in leaflets. ''Down with the olive branch and up with the gun.''

In the northern West Bank town of Jenin, paramilitary border police shot and killed a Palestinian in the market place after he refused orders to halt and instead drew a pistol, army officials said.

They said the victim had been wanted for months on suspicion of killing alleged Palestinian informers.

An Arab reporter, citing witnesses, said plainclothes troops entered the market accompanied by three Arab informers and opened fire when they spotted the man, identified as Bassem Fathi Shabaan, 20.

Shabaan was shot several times in the chest and head, said the reporter, who spoke on condition of anonymity. He said he did not know whether Shabaan was armed.

Palestinian reporters said Shabaan belonged to the Black Panthers, a vigilante group that has killed more than 30 suspected collaborators in the Jenin area this year.

His death brought to 870 the number of Palestinians killed by Israeli troops and civilians during the 4-year-old Palestinian uprising. Another 466 Palestinians have been killed by fellow Arabs, most on suspicion of helping Israel. Seventy-four Israelis have also died in the violence.

In Gaza City, a Palestinian mechanic, Mohammed Mahmoud Daloul, 22, was stabbed and killed by three masked men today, Arab reporters said. The motive was not immediately clear. The army said it was checking the report.

On Wednesday, masked men axed to death the Gaza Strip's head nurse, Aysha Abu Sharisha, 40, in her Khan Yunis home, then fled.

Mrs. Abu Sharisha, a supporter of the PLO's mainstream Fatah faction and an employee of the military government, was involved in trying to transfer health services in Gaza from Israeli to local hands, Arab reporters and Israel television said.

It was not immediately clear whether she was killed on suspicion of collaborating with Israel or because she was working toward some form of Palestinian self-rule.

Palestinians and Israelis are trying to work out the terms of self-rule as an interim agreement. Palestinian opponents of the peace process say the talks are a sell-out.

Military officials have expressed concern that the slaying signaled the start of a wave of attacks against Palestinian supporters of the peace talks, the daily Maariv said today.