Suspect Nedal Amer, 42, led investigators to a well north of the West Bank village of Siniria Saturday where they found Tomer Hazan's body, the army said.
Hazan was buried Sunday afternoon at the Holon military cemetery.
Hazan's parents alerted police after he failed to return home Friday night. The Shin Bet with police and the Israeli army opened a situation room and began searching for Hazan.
An investigation indicated Amer persuaded Hazan to accompany him to the West Bank village where he allegedly killed him and threw his body in the well, the army said. The two met at a Bat Yam restaurant where they both worked.
Shin Bet operatives and Israeli security forces raided Amer's village, Beit Amin, located near Siniria, and arrested him and six other family members.
Amer reportedly confessed to the crime, saying he planned to use the body as a bargaining chip to secure the release of his brother, Nur al-Din Amer, a Fatah Tanzim operative incarcerated in Israel since 2003 for terrorist activities.
The Shin Bet said more arrests are possible.
"The suffering over the loss of your son is difficult. The criminal incident proves once again that the fight against terrorism is constant," Israel's Army Radio quoted Prime Minister Binyamin Netanyahu saying Saturday night.
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