Palestinian leader Mahmoud Abbas has announced a cut in all ties with Israel and the United States, including security cooperation.
Mr Abbas said the peace plan unveiled by US President Donald Trump on Tuesday was in "violation of the (autonomy) accords" launched in Oslo in 1993 by Israel and the Palestinians.
Israel will have to "bear responsibility as an occupying power" for the Palestinian territories, he told an emergency Arab League meeting in Cairo.
The Palestinian leader said the decision follows the US and Israel's "disavowal of signed agreements and international legitimacy".
Israel will have to "bear responsibility as an occupying power" for the Palestinian territories, Mr Abbas said, adding that Palestinians will press ahead with their legitimate struggle using peaceful means.
Under the plan, Israel would retain control of the contested city of Jerusalem as its "undivided capital" and annex settlements on Palestinian lands.
Mr Trump said Palestinians would be allowed to declare a capital within annexed east Jerusalem.
Palestinian leaders have rejected the deal, saying it deserved to go in the "dustbin of history".
The Arab League rejected Mr Trump's plan, calling it "unfair" to Palestinians.
The pan-Arab bloc said in a statement that it "rejects the US-Israeli 'deal of the century' considering that it does not meet the minimum rights and aspirations of Palestinian people."
Arab leaders also vowed "not to ... cooperate with the US administration to implement this plan."