Palestinian Authority president Mahmoud Abbas has blocked a decision by the Hamas-led government to form a new volunteer security force.
Popular Resistance Committees are involved in firing rockets into Israel
On Thursday, new Palestinian Interior Minister Said Siyam announced the formation of a force comprising members of militant groups.
Mr Siyam also nominated the militant leader Jamal Abu Samhadana to senior security post.
The move was criticised by the Israel and the United States governments.
Israeli Housing Minister, Zeev Boim, on Friday threatened to target Mr Samhadana, and said his appointment did not give him any immunity.
Mr Samhadana is wanted in Israel for ordering attacks on Israeli targets.
"President Abbas considers the decisions of Interior Minister Said Siyam illegal and anti-constitutional and he has sent a letter to this effect to Prime Minister Ismail Haniya," Tayeb Abdelrahim, a senior aide to Mr Abbas, said.
Mr Abbas later issued a presidential decree nullifying the Hamas-led government's proposal.
Under the Palestinian Authority's basic law, which functions as a constitution, the president has the power to veto senior government appointments and has overall control over security.
BBC Jerusalem correspondent Caroline Hawley says this is the first time since the Hamas-led government took office that Mr Abbas has used his powers to overturn a decision it has made - and this reflects growing tensions between them.
The 45-year-old Mr Samhadana, who leads the Popular Resistance Committees militant faction, has already escaped Israeli assassination attempts.
The group has been responsible for many attacks on Israel, including rockets launched from Gaza in recent weeks.
"We have a long account to settle with this notorious terrorist, and his nomination gives him no immunity," Housing Minister Zeev Boim told Israeli public radio.
"The nomination of this killer to a security post is the final word in cynicism and demonstrates again the new terrorist nature of the Palestinian Authority since Hamas took control," he said.
"Sooner or later we will get our hands on him," added Mr Boim, a former deputy defence minister.
US State Department spokesman Sean McCormack said the nomination of Mr Samhadana was "just another window into the nature of this Hamas-led government and underscores the importance of the international community maintaining unity in sending a strong message to them to change".
In separate development, Mr Abbas has warned of a humanitarian catastrophe if Western donors continue to withhold aid to the Palestinian Authority.
Mr Abbas said the European Union's freeze on budgetary aid since Hamas won the general election and formed a government was unjustified.
He said that if Western nations didn't want to deal directly with the new Palestinian government, there were other means of getting much-needed assistance to the people.
President Abbas said one way was to channel it directly through his office - and he would make sure the aid went to those who needed it most.
The Palestinian leader was speaking before leaving for an overseas tour, which will take him to Jordan, Turkey, Norway, Finland and France.