Palestinian Authority President Mahmoud Abbas has dismissed the Hamas-led coalition government and declared a state of emergency.
Hamas says that it is now fully in control of Gaza
Aides said the president would seek to call elections as soon as possible, after deadly clashes between his Fatah faction and Hamas in the Gaza Strip.
PM Ismail Haniya, of Hamas, said that Mr Abbas' decision was hasty and vowed to continue working for unity.
Hamas says it is in total control of Gaza, taking the presidential compound.
More than 100 people have died on the streets of Gaza during a week of factional battles between Fatah and Hamas.
After dismissing the government, Mr Abbas will now rule by presidential decree until the conditions are right for elections, a senior aide announced.
US Secretary of State Condoleezza Rice gave her backing to Mr Abbas, saying he had exercised his "lawful authority".
"We fully support him in his decisions to try to end this crisis for the Palestinian people and to give them an opportunity to return to peace and a better future," she said.
The crisis has now prompted the European Commission to suspend humanitarian aid to the Gaza Strip.
The BBC's Matthew Price in Jerusalem says the West Bank and Gaza Strip will now effectively be split from one another - Gaza run by Hamas and the West Bank by Fatah.
But Mr Haniya said Mr Abbas had taken "premature decisions that betray all agreements reached".
He rejected the notion of a separate Gaza state, saying: "The Gaza Strip is an indivisible part of the homeland and its residents are an integral part of the Palestinian people."
Mr Haniya said he would maintain the national unity administration agreed with Fatah three months ago and would impose law and order decisively and legally.
Hamas fighters overran most of Gaza on Thursday, capturing the headquarters of Fatah's Preventative Security force and hailing Gaza's "liberation".
After nightfall militants entered Mr Abbas' presidential compound, which had been left undefended when Fatah men slipped away earlier.
Palestinian Information Minister Mustafa Barghouti said Hamas was in total control of Gaza.
"What is happening now is not only the collapse of the Palestinian national unity government but actually the collapse of the whole Palestinian Authority," he told the BBC.
Mr Abbas said he had issued his decree because of the "criminal war in the Gaza Strip" and the "armed rebellion by outlaws".
Hamas won a surprise victory in Palestinian elections in early 2006 but has since been engaged in a violent power struggle with Fatah.
Hamas, an Islamic organisation, rose to prominence in Gaza during two Palestinian uprisings and refuses to recognise or negotiate with Israel.
Fatah, a secular political grouping headed by Mr Abbas, ran the Palestinian Authority until 2006 and officially recognises the Jewish state.