Yasir Arafat confirmed the cabinet's new ministers, mostly his loyalists, in a ceremony in Ram Allah on Wednesday.
Deputies voted 48-13 to back Prime Minister Ahmad Quraya's 24-member cabinet after two months of paralysing power struggles.
Speaking in parliament, Arafat adopted a conciliatory tone towards Israel despite continued invasions of Palestinian land.
"We do not deny the right of the Israeli people to live in security side by side with the Palestinian people also living in their own independent state," he said.
The 74-year-old leader accused Israel of "a criminal war" of incursions and blockades to crush his people's aspirations, then switched gear and extended an olive branch.
"The time has come for us to get out of this spiral, this destructive war, that will not bring security to you or us."
But Israeli Defence Minister Shaul Mofaz, speaking later in Washington, said it would take years to reach a permanent agreement with the Palestinians.
"We do not deny the right of the Israeli people to live in security side by side with the Palestinian people also living in their own independent state"
Mofaz proposed working towards an interim arrangement after intractable violence stalled a US-led "road map" peace plan for a Palestinian state by 2005.
He said: "It will be very difficult from the situation that we are facing today to reach in a month or a few years a permanent agreement."
"I believe that we have to go through some interim agreement that will rebuild the trust between the two sides, will give us a proper sense of security for the people of Israel, and give hope to the Palestinian people."
But he added: "It will make it very difficult to move forward if he (Arafat) will be the man that will give the orders and directions."
Meanwhile, a Palestinian detainee was expelled by the Israelis early on Thursday from the West Bank to the Gaza Strip.
Taha Dwaik, 26, a Fatah activist from Jenin, was officially placed under house arrest in the Gaza Strip, an Israeli military source said.
Fatah is the leading Palestinian organisation headed by Yasir Arafat.
The source said he agreed to be expelled for two years rather than continue his detention, but he formally denied this when he arrived in the Gaza Strip.
Against Geneva Convention
Dwaik hit out at the expulsion order and told journalists he had been moved against his will from the Ofer detention camp near Ram Allah.
"It will make it very difficult to move forward if he (Arafat) will be the man that will give the orders and directions"
Israeli defence minister
He was expelled hours after the Israeli Supreme Court authorised the army to banish another West Bank Palestinian, Taha Dwaik from Hebron in the south, and to transfer him to the Gaza Strip.
Palestinians have protested that the expulsions were in violation of Article 49 of the Geneva Convention banning the forced transfers of individuals or groups living under occupation.
But the Supreme Court argued they were displaced and not expelled.
Six Palestinians wounded
Earlier in the day, six Palestinians were wounded during an Israeli invasion of the occupied territories.
Two Palestinians were seriously wounded late on Wednesday when Israeli troops raided the Gaza Strip town of Rafah.
Palestinian security sources said the Israelis were trying to demolish a home they suspected was being used to smuggle arms across the border with Egypt.
The two Palestinians were hit by Israeli gunfire during the raid, the sources said without elaborating.
And in a separate incident, Aljazeera's correspondent in Jenin said four Palestinians were wounded on Wednesday evening when Israeli forces opened random fire at curfew-breakers in Yamoun.
For the second day running, the occupation forces imposed a curfew on the city of 20,000 people.