Prime Minister-designate Ahmad Quraya must now meet the Palestine Liberation Organisation's executive, led by Arafat, to finalise his cabinet list before submitting it to parliament for approval, expected in the coming week.
Fatah officials said Quraya had appointed Nasir Yusuf, an Arafat loyalist, as interior minister, replacing the US-backed Muhammad Dahlan.
They said Yusuf would be "empowered" to impose security to end what outgoing Prime Minister Mahmud Abbas had bemoaned as the "armed chaos" of militant factions.
But given Quraya and Yusuf's pedigree as longtime Arafat allies, the United States - which joined Israel in trying to sideline the Palestinian president - has voiced doubt about the new administration's leeway to succeed where Abbas failed.
Two ministers stay
Abbas pledged to rein in armed factions and democratise governance to advance the peace plan. But he resigned over what he called obstruction by Arafat - who denies charges of fomenting violence - and continued Israel army strikes against activists in residential areas.
At least two key members of the outgoing cabinet favoured by Washington - Finance Minister Salam Fayyad and Foreign Minister Nabil Shaath - kept their posts in a preliminary list of 23 members of the new government, officials said.
Nabil Shaath will stay as Palestine's foreign minister
There were almost a dozen new faces, including a supporter of main Islamist resistance group Hamas and two from leftist secular factions with reservations about peacemaking with Israel.
Quraya tried to lure actual officials from Hamas and ally Islamic Jihad into the cabinet to maximise its popular backing, but they spurned him in favour of a continued struggle against Israel.
Israel braces for attacks
The Palestinian cabinet took shape with Israel on high alert for possible violence over its New Year holiday weekend, coinciding with the third anniversary of a Palestinian uprising, the Intifada, launched in the West Bank and Gaza Strip.
A member of the Islamic Jihad was killed in the southern Gaza city of Rafah on Saturday when a bomb blew up as he was assembling it. Jihad sources said another member was wounded.
The road map peace plan for Palestinian statehood on land occupied by Israel in the 1967 Middle East war has been stymied since its launch in June by intractable tit-for-tat bloodshed and an Arafat-Abbas power struggle.
The US-led "Quartet" of mediators on Friday put the onus on Palestinians to save the plan by subduing militants while also demanding Israel to stop expanding settlements on occupied Palestinian lands they are seeking for a state.
Arafat's supporters rally in Khan Younis refugee camp, Gaza Strip
But a cycle of violence bedevilling diplomacy was likely to continue after a Palestinian killed two Israelis in a Jewish settlement on Friday night before being shot dead.
Israel vowed further military strikes against what it calls the Palestinian "terrorist infrastructure" after the assault inside Negohot enclave.
Israel clamped a general ban on Palestinian travel within and out of the West Bank and Gaza, except for humanitarian reasons, until the New Year ends at sunset on Sunday.
Hundreds of masked activists firing assault rifles in the air and holding up photos of Arafat marched in the Gaza city of Khan Younis to mark the anniversary of the Intifada.