Palestinian President and Fatah leader Mahmoud Abbas has sworn in a new emergency government and outlawed the rival Hamas movement.
The move further deepens the divide sparked by Hamas' successful takeover of Gaza. Hamas overran Fatah strongholds in Gaza after a week of bloody battles that left over 100 Palestinians dead.
The new 13-member government, headed by Prime Minister Salam Fayyad, excludes Hamas.
President Abbas, who is leader of Fatah, has also introduced legislation which gives the new government power to rule without the approval of the Hamas-dominated parliament.
The Islamists have in turn refused to recognise the new authority, describing it as 'illegitimate'.
However, Palestinian officials hope however that the creation of the emergency cabinet, without Hamas, will lead to the lifting of a crippling Western aid boycott.
Queues of peoplehave queued outside bakeries and supermarkets, as frantic residents stock up on food, fearful of shortages if Israel keeps all border crossings closed.
But Israel has indicated its support of Mr Abbas's new cabinet and suggested it could release several hundred million dollars owed to the Palestinians if the situation holds.
Israel has sent troops into northern Gaza and has cut off petrol supplies to the territory, a move described as a 'preventative' action by deputy Israeli Defence Minister Ephrain Sneh.
BBC journalist to be freed - Hamas
A Palestinian militant group allegedly holding the BBC journalist, Alan Johnston has denied that any deal has been done with Hamas to release him.
In a video shown on Al Jazeera television, a masked man identified as a spokesman for the Army of Islam in Gaza said that Mr Johnston would only be released if its demands were met.
Earlier today, it was reported that Alan Johnston, abducted in Gaza three months ago, will be released today, according to a Hamas official.
Abu Osameh al-Mo'ti made the announcement after Hamas seized control of the Gaza Strip last week in a surge of factional fighting with rival group Fatah.
Another Hamas official in Gaza, Sami Abu Zuhri, was more cautious about the possibility of Johnston being freed, saying that while intensive efforts were being made for his release, an exact time could not be predicted.
Mr Mo'ti said Hamas was in negotiations with those holding him, but did not specify how he knew the British journalist would be freed.
He suggested Hamas knew both who the abductors were and where Mr Johnston was being held, adding the 45-year-old British journalist was in good health.
'We are negotiating to solve the issue peacefully', Mr Mo'ti said, adding: 'We asked them to release him without any conditions.'
Alan Johnston, the only Western correspondent based full-time in Gaza, was seized on 12 March.
His abductors, a little-known group called the Army of Islam, issued a video (left) of him on 1 June in which he said he was being treated well, although it was not known when the tape was made.
A BBC spokesman in London declined to comment.
Mr Johnston, who is from Scotland, turned 45 in captivity last month.
In the 1 June video, the group holding him repeated its demand for Britain to free Muslim prisoners, particularly the Islamist cleric Abu Qatada.
Hamas has made some conciliatory overtures, saying it did not seek its own state in Gaza where 1.5 million people are crowded along 40km of coast.
US consul-general Jacob Walles, who handles relations with the Palestinians, has said Washington will lift a ban on direct financial aid to the new emergency government, clearing the way for the European Union and Israel to follow suit.
Mr Walles said there will be no 'obstacles economically and politically in terms of re-engaging with this government'.
Under Palestinian law, Mr Abbas' state of emergency is not to exceed 30 days, but it could be extended for another 30 days after winning the approval of two thirds of the parliament.
Hamas holds a majority in the Palestinian Legislative Council though Israeli arrests of its deputies makes it difficult to reach a quorum and hold decision-making sessions.
That could enable the Palestinian President to keep the state of emergency in place longer. Some Fatah officials and US diplomats have argued that Mr Abbas could rule by decree for six months to a year ahead of new elections.