Palestinian President Mahmoud Abbas has called for presidential and parliamentary elections to be held at the "earliest opportunity".
Mr Abbas was speaking in Ramallah
He was speaking live on Palestinian TV after days of escalating tensions between Hamas and his Fatah movement that have raised fears of civil war.
Hamas, elected in January, immediately rejected the move as a "coup attempt".
Hours after Mr Abbas spoke, armed supporters of Fatah and Hamas exchanged gunfire in the southern Gaza Strip.
Several gunmen are reported to have been injured in the clash in Khan Younis.
At the end of a major policy speech in Ramallah, Mr Abbas said: "I decided ...to call for early presidential and parliament elections."
He blamed Hamas for the crisis triggered by the suspension of Western aid over the group's refusal to recognise Israel and renounce violence.
The Palestinian people were suffering from an economic siege, which had halved incomes, he said.
It is not clear when the elections would be held, and actually organising them is easier said than done, says the BBC's Nick Thorpe in Ramallah.
Many Palestinians say the president has no right to dissolve the government, while President Abbas insists that he does.
It will be up to the Central Election Commission to try to find a legal way of carrying out the president's orders, our correspondent says.
The current Palestinian parliament was elected in January and is due to remain in office until the end of 2010.
Mr Abbas said the best solution would still be to form a national unity government of experts.
But months of talks between Hamas and Fatah on such an administration have foundered.
Tens of thousands of Hamas supporters rallied on Friday
At the end of a long and indignant speech, there finally came the moment supporters of Mr Abbas had been waiting for - a call for new elections. But the Hamas government reacted immediately, saying it was "a coup against Palestinian legitimacy and the will of the Palestinian people".
Ahmed Yousef, an adviser to the Palestinian Prime Minister Ismail Haniya, said the call for elections was a recipe for internal strife.
"I think this will lead to bloodshed because this is something against the constitution. This is something which is not in his authority and I think the president by his call today became part of the problem, not part of the solution."
Hamas members boycotted the speech by Mr Abbas to the Palestinian parliament.
Several Palestinian factions based in the Syrian capital, Damascus, also rejected the call for early elections.
In a joint statement, they said the move was unjustified and that Hamas and Fatah should instead meet again to discuss forming a government of national unity.
However the call by Mr Abbas was welcomed by White House officials in Washington and by UK Prime MInister Tony Blair on his Middle East tour.
The past week has been marked by attacks, counter-attacks and mutual accusations.
Hamas blamed Fatah for a shooting that targeted PM Ismail Haniya on Thursday, but Mr Abbas, in his speech, denied there had been any conspiracy to kill Mr Haniya.
The shoot-out at the Rafah border crossing led to more clashes on Friday, both in the West Bank and in Gaza City.
Some 32 people were injured when Palestinian police loyal to Fatah fought Hamas supporters in the West Bank town of Ramallah.
Egyptian diplomats based in Gaza have been trying to mediate in the current crisis.
They have stepped in a number of times before to calm the situation provoked by the chronically bad relations between Hamas, the largest faction, and Fatah but the current tensions are at their worst for years.