All 15 candidates with Mahmoud Abbas's party said on Friday that they were withdrawing because Israel has yet to commit officially to allowing east Jerusalem residents to vote.
The Palestinians claim predominantly Arab east Jerusalem as the capital of a future state. Israel, which captured east Jerusalem in the 1967 war, says the entire city is its eternal capital.
Hatim Abd al-Kadir, one of the leaders of the group, said: "Jerusalemites should be allowed to participate in the elections the same as the other Palestinians in the West Bank and Gaza. We think that if there will be no elections in Jerusalem, then there should be no elections at all."
Israel has allowed Arabs in east Jerusalem to participate in previous Palestinian elections. But it has threatened to ban voting this time if the Palestinian Authority does not prevent the Islamic group Hamas from running.
Hamas, which has killed hundreds of Israelis in bombings and remains committed to Israel's destruction, appears poised to make a strong showing against the ruling Fatah party of Abbas, the Palestinian president, in the election.
Recently, however, Israeli officials said the government may drop its opposition to allowing Palestinian residents of Jerusalem to vote in next month's elections.