Palestinian PM Ismail Haniya has resigned his post and has been asked by President Mahmoud Abbas to form a new national unity government.
Ismail Haniya (left) and Mahmoud Abbas sealed the deal in Mecca
The move came after the pair ironed out last-minute problems from the power-sharing deal sealed last week.
Factional fighting between Mr Abbas's Fatah and Mr Haniya's Hamas has claimed more than 90 Palestinian lives between December and this month.
Doubts remain as to whether the US will end its boycott of the government.
A ban on Western financial aid has crippled the Palestinian Authority since Hamas, which has refused to recognise Israel, won elections in January last year.
Mr Haniya tendered his resignation at the meeting with Mr Abbas in Gaza.
Scores have been killed in factional fighting
"Brother Ismail Haniya presented me with his government's resignation and I charged him with forming his new cabinet," Mr Abbas said.
He said he hoped the new administration would "inaugurate a new Palestinian era in which people live in peace and security".
Mr Haniya will have five weeks to get the new cabinet accepted by the Hamas-dominated parliament.
Mr Abbas had called off a national address on Thursday because of last-minute problems over the new power-sharing deal.
Hamas was reportedly unhappy about moves to dissolve a security force that it has established.
There were also disputes over appointments to key cabinet posts.
On Thursday it was unclear whether the US would back the new government.
Aides to Mr Abbas said Washington would continue its boycott unless the government met international demands over Israel.
The aides said the US position had been conveyed by Assistant Secretary of State David Welch in a phone call and in person to Mr Abbas by US consul general in Jerusalem, Jacob Walles.
US state department spokesman Sean McCormack said Washington would not make a judgement until the government was formed.
As part of the power-sharing deal it was reported that Hamas had agreed to respect past Palestinian agreements that recognise Israel.
However, the BBC's Alan Johnston in Gaza says the Americans are expected to demand an explicit statement of recognition and a renunciation of violence.
Other nations, he says, will argue that the Palestinians have done enough and there could be a split among countries that recognise the new government.
A three-way summit between Mr Abbas, US Secretary of State Condoleezza Rice and Israeli PM Ehud Olmert is scheduled for Jerusalem on Monday.