Militants in the West Bank town of Jenin abducted the Palestinian governor and held him captive for several hours.
The group has been blamed for several attacks in recent weeks
Haider Irsheid was pulled from his vehicle and beaten before being driven off by members of the al-Aqsa Martyrs' Brigade.
The group accused him of collaborating with Israel.
Mr Irsheid was released after the militants received an order from Palestinian leader Yasser Arafat.
"We released him because we received instructions from the president to do so. We do not question the president's instructions," Zakariya Zubeidi, leader of the local
branch of Al-Aqsa, told Reuters.
It was the first time a militant group has taken action against a senior figure from the Palestinian Authority.
"This is a very unfortunate issue, we discussed it during the cabinet meeting, when we got the urgent news," Nabil Amr, the Palestinian Minister of Information said. "These things must not happen to any official figure of the Palestinian Authority."
Gunmen reportedly pulled the 50-year-old official from his van and beat him with hands and gun butts, then dragged him to a central square in Jenin before bundling him into another vehicle and driving off toward the city's refugee camp.
"He sent his men to shoot at members of the al-Aqsa Martyrs Brigades and tried to assassinate others," Mr Zubeidi told Reuters.
Al-Aqsa, an offshoot of Yasser Arafat's Fatah organisation, has been blamed for several attacks on Israelis since the main Palestinian militant groups declared a ceasefire on 29 June.
Israel is demanding the Palestinians disarm militant groups as a condition of the US-backed peace plan known as the "roadmap".
But the Palestinians want to see large scale prisoner releases in return for the current ceasefire.
Our correspondent in Jerusalem says deep divisions within the Palestinian community over how to proceed with the peace process came to a head recently, when the prime minister, Mahmoud Abbas, offered to resign.
Mr Abbas, better known as Abu Mazen, has officially patched up his differences with Mr Arafat but this latest incident shows that the underlying tensions over the peace process are far from resolved, our correspondent adds.
Dozens of Palestinian men have been executed as suspected collaborators since the beginning of the uprising - or intifada - in September 2000.
The killings are usually brutal and occasionally public to deter others from helping Israel.
Last August, Palestinian militants killed a 35-year-old woman they said was working with the Israelis - the first such reported killing of a woman.