However, the government will maintain contacts with Mahmoud Abbas, the Palestinian president, although it has ruled out full peace talks with the leader of the Fatah faction.
The decision was announced after a security cabinet meeting on Sunday.
In a statement issued after the meeting Ehud Olmert, the acting Israeli prime minister, also said his government would shun foreign diplomats who meet members of the Hamas administration.
The move came as the military wing of Hamas said it would avenge the death of 15 Palestinians killed during Israeli air attacks on Gaza over the weekend.
Jericho office closure
On Monday, the Israeli army ordered Palestinian security officials to close down a liasion office in Jericho as part of the move to sever all contacts with the PA.
A statement from the army said the Palestinian officers had been given until noon (0900 GMT) to leave the office on the outskirts of the West Bank town, one of the few areas where responsibility for security had been in the hands of the Palestinian Authority.
The statement said the move was "in accordance with a decision made by the political echelon" and comes after a new pledge by Olmert to have no link with the government.
Olmert in his statement on Sunday said: "Israel will have no contact with the Palestinian Authority, which is a hostile authority, and will work towards preventing any entrenchment of the Hamas government's rule.
"But at the same time, there will be no personal disqualification of the chairman of the Palestinian Authority."
The boycott of foreign diplomats is similar to one imposed on those who met the late Palestinian leader, Yasser Arafat.
"The Zionist enemy will pay a high price and will drink from the same cup from which our people drink day and night"
Ezzedine al-Qassam Brigades
Then diplomats were able to meet Israeli officials only after leaving the region and returning at a later date.
Israel says it will have no contact with Hamas unless it gives up its campaign of resisting occupation and agrees to recognise the Jewish state.
Olmert also said Israel would continue its military operations as long as Palestinian fighters carried on launching rocket attacks on Israel.
"There is no restriction on the security services regarding the carrying out of these actions wherever they identify the danger of terrorist activity," he said.
The Ezzedine al-Qassam Brigades, Hamas's military wing, issued a statement pledging revenge on Israel.
Olmert says his government will
shun Hamas-friendly diplomats
"The Zionist enemy will pay a high price and will drink from the same cup from which our people drink day and night," it said.
On Sunday, the Israeli army fired artillery shells at a Palestinian security post in the northern Gaza Strip, killing one person and wounding at least six others.
On Saturday, eight Palestinian fighters were killed in two separate air strikes.
The Israeli army also killed five fighters and a five-year-old boy in a strike on a car in southern Gaza on Friday.
Israel says the strikes are in response to rocket attacks coming from the area.
Aljazeera quoted a spokesman for the Palestinian government, Gazi Hamed, as saying: "We urge the US and the European Union to take serious and clear action in response to Israel's frequent killings."