The minister, Said Siyam, issued a decree appointing Jamal Abu Samhadana, the head of the Popular Resistance Committees, as director general of the Interior Ministry.
The 45-year-old, who has escaped two Israeli assassination attempts, will be in a position to oversee all police, as well as civil and preventative security forces.
A former security officer who was dismissed for refusing to report for duty during the uprising against Israel, Samhadana was given the rank of colonel.
The task of the new force, to be made up of hundreds of volunteers, would be to support the security forces, which are dominated by the Fatah faction of the Palestinian Authority president, Mahmoud Abbas.
"We want to end the security chaos. We want to end the security chaos and illegal activity in the Palestinian territories at all price"
Palestinian interior minister
The announcement came amid tensions between Abbas, who is officially in charge of security responsibilities and appointments, and a Hamas government flexing its muscle.
The move infuriated the United States and Israel.
"We want to end the security chaos and illegal activity in the Palestinian territories," Siam told supporters in Gaza City.
"We need all people to support us in this mission."
Security chaos is rife in the Palestinian territories, where armed groups largely operate above the law and the authorities have proved incapable of acting on promises to rein in gunmen.
The interior ministry spokesman, Khalid Abu Hilal, said the new force would be made up of hundreds of fighters from the armed wings of all factions, and would support the work of police and security services.
"This is just another window into the nature of this Hamas-led government"
US state department
They would not be paid a salary by the Palestinian Authority, which is in the midst of an acute financial crisis, but serve on a voluntary basis.
Asked if the new force would include members of Hamas' armed wing, the Ezzedine al-Qassam Brigades, Abu Hilal replied that it would consist of "all the factions".
The Qassam Brigades have carried out dozens of anti-Israeli suicide attacks over the past decade, although none in the past year. Hamas has been blacklisted as a terrorist organisation in the West.
US, Israeli rebuke
Washington and Tel Aviv, which are boycotting the Hamas-led government, were quick to denounce the appointment.
"This is just another window into the nature of this Hamas-led government and underscores the importance of the international community maintaining unity in sending a strong message to them to change," said the US state department spokesman, Sean McCormack.
He said the United States would hold the Palestinian government accountable for preventing acts of terror and for dismantling terror groups as required under agreements previous Palestinian governments have signed.
Gideon Meir, an Israeli foreign ministry official, echoed that.
"If someone needed proof about the connection between the Hamas rule and Palestinian terror, this appointment is the ultimate proof for this connection," he told the AP. "It's like allowing the fox to guard the chicken coop."
Islamic Jihad won't join
Meanwhile, Hamas' rival, Islamic Jihad, announced that it would not take part in the new force, with its spokesman, Abu Abdullah insisting that "our mission is to resist the Israeli occupation."
Jihad has been behind the last six other suicide bombings on Israel.
The group claimed responsibility on Monday for a suicide bombing in Tel Aviv that left six people dead and dozens wounded.
Security is a key battleground in tensions between the radical Islamist group and Abbas since Hamas' landslide election win in January that ended Fatah's decade-long domination of politics.
"If someone needed proof about the connection between the Hamas rule and Palestinian terror, this appointment is the ultimate proof"
Gideon Meir, an Israeli foreign ministry official
Abbas' response to growing mayhem in the territories has been to name the Fatah strongman in Gaza, Rashid Abu Shbak, as overall head of the myriad security forces, sparking complaints from Hamas prime minister Ismail Haniya.
"The government has been denied responsibility over security bodies, the borders and other powers, but it still needs to pay salaries," Haniya said on Friday.