"She is the first witness to give us a face," Holmer said.
He said the woman, whom he would not identify, was able to describe the man in detail. Earlier reports have described the man only as 35 to 45, about 5- foot-8 and wearing dark clothing, police said.
Police said that the woman had a clear view of the man's face as he passed under a street light and that she had produced several "very interesting" sketches.
Holmer said the encounter occurred near where police believe at least one accomplice was waiting with a getaway car about a quarter-mile from the shooting scene.
"The time element is correct," Holmer said during the news conference. ''This man can be the killer."
Yesterday, one of Palme's sons, Marten Palme, 24, who was with his parents until shortly before the killing, was quoted as saying that he saw a suspicious man following his father minutes before the assassination.
He said the man wore a cap with ear flaps, similar to one witnesses have said the killer wore.
Holmer said the artist's sketch would not be released until the West German experts had a chance to examine the drawing.
The West German participation in the Palme case increased speculation that police believe West German terrorists carried out the assassination.
Police say there have been several claims of responsibility on behalf of the Red Army Faction and Holger Meins Commandos, related left-wing West German terrorist groups.
Some details of Palme's funeral, scheduled for March 15, were disclosed yesterday by the Social Democratic Party, which Palme headed for 17 years.
A civil ceremony will be held in Stockholm's waterside city hall. Then the body will be taken by motorcade through the capital to the 18th-century Adolf Fredrik Lutheran Church for the burial service.