The decision by Fatah's central committee in an emergency meeting on Sunday reflected earlier statements by Mahmoud Abbas, the Palestinian president, who was in Abu Dhabi, capital of the United Arab Emirates.
"This is only one condition, that they [the elections] proceed in Jerusalem as was the case during the legislative elections in 1996 and the presidential election in 2005," Abbas said.
"Nobody will accept that the Palestinians of Jerusalem will not take part in the elections of January 25, because this is a sacred national event for us."
On Saturday, eight members of the committee, including Ahmed Qurei, the prime minister, and Nabil Shaath, his deputy, had called for the elections to be postponed.
They said that this was necessary because Israel had not agreed to allow voting in Jerusalem and also because of the dire security situation in the Palestinian territories.
Fatah's traditional domination of Palestinian politics is facing an unprecedented challenge from the Islamist Hamas movement, which is taking part in legislative elections for the first time.