About 35 members of a group known as the Fatah Hawks detained Shaker Abu Eida, the Palestinian Authority's ambassador to North Korea.
Abu Eida told journalists on Saturday he had not been harmed and that he would be allowed to return to Gaza City if he wished.
However, one of the masked men said the envoy's diplomatic passport had been confiscated. "Nobody from the Palestinian Authority will travel to Egypt today," the man said.
The group said it had caused traffic disruption to highlight what it claims is an unfair police recruitment policy.
Speaking to Aljazeera, the unnamed spokesman said the group had been excluded from a recent Palestinian Authority drive to recruit 5000 police officers because they were older than the maximum stipulated age of 23.
They insisted that former Palestinian resistance fighters in Gaza should have been merged into the security services.
A Palestinian Interior Ministry official was in contact with the gunmen and trying to resolve the situation. Palestinian security forces in the Rafah area did not immediately intervene.