For the purpose of this debate, we're limiting the term "terrorist leader" to include only members of Hamas, Islamic Jihad, the Al Aqsa Martyrs Brigade, and the PFLP. Moreover, we're only reviewing Israel's policy since 2000. We are not debating whether killing Abu Jihad during the first Intifada was the correct move.
The question of whether a country should follow a certain policy can be analyzed in many different ways. But before we see if it should assassinate terrorist leaders, we must see if it can.
The "can" question is legal question. So to start: is it legal for Israel to assassinate Palestinian terrorist leaders? The applicable laws are international humanitarian law and the laws of war. I'm staying clear of Israeli law.
In short, the answer is yes. Article 23 of the Hague Conventions of 1907 (binding on Israel) makes it illegal “to kill or wound treacherously individuals belonging to the hostile nation or army.” It is almost unanimous that the Palestinians are not a nation in the legal sense, at least not for the purpose of the laws of war. They do not have a state or army and they cannot declare war.
So if the Palestinians do not have a state, what is the legal status of Hamas? Since we lack a universal definition of terrorism, it's hard to legally declare them terrorists under international law (under US and Israeli law they most certainly are, though). Hamas is a militia and carries out attacks on Israeli soldiers and civilians. They cannot be considered soldiers, but they cannot be considered civilians either. They would probably fall somewhere in between, probably best characterized as "illegal combatants" similar to most of those in Guantanamo.
Combatants, legal or not, are not afforded due process rights. A soldier is not required to issue an indictment before shooting at the enemy. Similarly, the IDF is not required to protect their due process rights. Moreover, a soldier can kill a high ranking officer providing he does not "treacherously" do so. The term is usually understood to prohibit soldiers from dressing up as reporters and executing a general. But a fearless Delta Force member would be allowed to sneak into the enemy camp and kill the general. That would not be treacherous.
Furthermore this argument only applies to members of a recognized army. Hamas is not an army. They are not afforded the same protections.
I believe Israel can assassinate Palestinain terrorist leaders. Should they?
There are two reasons to carry out assassinations: to stop future terrorist attacks or to retaliate for previous ones. The former is much more morally palatable. The latter would seem to be more of a punishment; and punishments cannot be administered without due process.
Israel's stated policy is generally target "ticking bombs," which means the terrorists are on their way to commit an attack. Such a policy would seem morally just. It is no different than ambushing a soldier on the way to the front.
Often times, though, Israel has killed leaders who were not involved in carrying out an attack. For example, Israel executed Yassin and Rantisi, the two big leaders of Hamas, in a matter of weeks. Yassin was a blind paraplegic and was not going to carry out attacks.
However, I believe Israel is still within its rights to kill him. He provided moral support and most likely guidance about who and what to attack. Furthermore, he represented the top of the chain. Killing him would logically have a weakening effect on the organization. Leaders who fear for their lives are less likely to plan attacks. For most of the Intifada, the Hamas leaders hid (with the exception of Yassin who felt he was immune) and rarely used their cell phones. These reasons justify killing him and other leaders.
What about killing leaders for earlier attacks? Retaliation does serve as a form of deterrence. Leaders who know they will be killed are less likely to plan attacks. In fact, a purpose of punishment is to deter. Given the benefits of assassinations, such as the weakening of the chain and command and therefore the organization as a whole, it would seem justified.
Lastly, it would be better if the PA would arrest these leaders. And of course if Israel could, it should do the same. But to arrest a major player in Islamic Jihad would involve a massive invasion and would inevitably lead to more deaths on both sides.
There's a lot more to look at, especially the collateral damage issue, but I want to give DovBear something to talk about.