Mahmoud Abbas, whose long-dominant Fatah faction was crushed by Hamas in a 25 January parliamentary election, met Ismail Haniya, Hamas's prime minister-designate, in Gaza on Tuesday and gave him a formal letter authorising him to form a government.
In a letter to Haniya, Abbas also spelt out guidelines for a future Hamas administration, including a commitment from the group to abide by past interim peace accords with Israel.
Khaled Meshaal, Hamas's political leader, said: "Talking to Israel is a waste of time as long as there is no talk about withdrawing from Palestine."
Facing a financial crisis after Israel halted monthly tax payments to an already cash-strapped Palestinian Authority, Meshaal said in Tehran that Iran would play an increasing role in Palestinian affairs.
US and Israeli officials are concerned Tehran will try to exert control over a Hamas-led government, making the resumption of peace talks less likely.
Iran's Supreme Leader Ayatollah Ali Khamenei has called on Islamic countries to help fund a Hamas-led government.
The United States and Israel have long accused Iran of funding Hamas's campaign against Israel. But officials said they doubted Iran would be able to sustain the Palestinian Authority.
Israel has vowed to boycott Hamas until the group renounces violence, accepts past peace deals and recognises Israel's right to exist.
Hamas showed no sign of backing down. "Resistance will continue as long as the occupation and aggression continues," Meshaal said at Tehran University.
"Talking to Israel is a waste of time as long as there is no talk about withdrawing from Palestine"
Hamas's political leader
"There is no recognition of Israel, no matter what the cost is."
Ehud Olmert, the Israeli interim prime minister, said Israel would continue to "fight terror with all our might ... on a daily basis", but he still hoped for peace with Palestinians.
"Despite the slimmer chance, hope has not ceased," Olmert told Israel's Channel 1 television. "I am responsible for ... the struggle against Hamas and also protecting the hope and chance of reaching an agreement."
Olmert, who polls predict will win a general election on 28 March, has threatened to take unilateral steps to set borders for the Jewish state if peacemaking remains frozen.
Meanwhile, in the occupied West Bank, Israeli troops shot and wounded seven Palestinians, one seriously, in confrontation with protesters during a raid in Balata refugee camp, a resistance stronghold, Palestinian sources said.
The camp has been under curfew since late Saturday, when Israeli troops launched the raid in search of fighters suspected of planning suicide bombings.
Some Balata residents complained of food shortages as many merchants have kept their shops closed, witnesses said.
The Israeli army evacuated three small settlement outposts elsewhere in the West Bank, but many others have yet to be removed as called for in a US-backed "road map" to peace.
Meshaal said Iran would play a
key role in Palestinian affairs
The Israeli army continued its closure of Palestinian towns and villages in the West Bank, where the troops imposed a ban on the movement of Palestinians in Nablus.
Other towns and villages in the West Bank have witnessed widespread Israeli search operations seeking Palestinian fighters. Eleven Palestinians were arrested while Israeli occupation troops destroyed an ammunition cache in Nablus.
Abbas decried the Israeli aggression and described incidents in Nablus as "no longer tolerable".
"What Israel is doing in Nablus, the refugee camps and several other Palestinian towns and villages calls for alerting the whole world that the situation can no longer be tolerated.
"The course of events keeps deteriorating... Several Palestinians were wounded along with others who were killed or detained.
"We will openly tell the whole world that this cannot be tolerated. Accordingly, the Quartet, and the US in particular should ask Israel to put an end to such serious aggression," Abbas said.