(abridged) Based on observations of the Seyfert nucleus in NGC1068 with ASCA, RXTE and BeppoSAX, we report the discovery of a flare (increase in flux by a factor of ~1.6) in the 6.7 keV Fe K line component between observations obtained 4 months apart, with no significant change in the other (6.21, 6.4, and 6.97 keV) Fe K_alpha line components. During this time, the continuum flux decreased by ~20%. The RXTE spectrum requires an Fe K absorption edge near 8.6 keV (Fe XXIII - XXV). The spectral data indicate that the 2-10 keV continuum emission is dominated (~2/3 of the luminosity) by reflection from a previously unidentified region of warm, ionized gas located <~ 0.2 pc from the AGN. The remaining ~1/3 of the observed X-ray emission is reflected from optically thick, neutral gas. The inferred properties of the warm reflector (WR) are: size (diameter) <~0.2 pc, gas density n >~ 10^{5.5} /cm3, ionization parameter xi approx 10^{3.5} erg cm/s, and covering fraction 0.003 (L_0/10^{43.5} erg/s)^{-1} < (Omega/4 pi) < 0.024 (L_0/10^{43.5})^{-1}, where L_0 is the intrinsic 2-10 keV X-ray luminosity of the AGN. We suggest that the WR gas is the source of the (variable) 6.7 keV Fe line emission, and the 6.97 keV Fe line emission. The 6.7 keV line flare is assumed to be due to an increase in the emissivity of the WR gas from a decrease (by 20-30%) in L_0. The properties of the WR are most consistent with an intrinsically X-ray weak AGN with L_0 approx 10^{43.0} erg/s. The optical and UV emission that scatters from the WR into our line of sight is required to suffer strong extinction, which can be reconciled if the line-of-sight skims the outer surface of the torus. Thermal bremsstrahlung radio emission from the WR may be detectable in VLBA radio maps of the NGC 1068 nucleus.
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