There have been differences between the two sides over the extent to which the Taliban would implement a previous deal allowing them to enforce their own interpretation of sharia in Malakand, in exchange for peace with Islamabad.
While making the announcement on the sharia court, known locally as Dar-ul-Qaza, Hussain quoted Sufi Muhammad as saying that anyone who continues to hold arms after the new regulations will be considered an insurgent.
"Now anyone carrying arms would be treated as a rebel and would be prosecuted in the qazi courts," Hussain said.
He said two judges have been appointed so far to the panel, and more will be named later. Several judges trained in sharia have been hearing routine cases in Swat since the deal was struck.
Al Jazeera's Kamal Hyder in Islamabad said: "The important thing that is going to come out of this is that the government has said it will deal sternly with anyone and everyone who violates the accord with weapons."
It remains to be seen whether the NWFP government's move to allow Dar-ul-Qaza in Malakand will lead to the end of hostilities between the Pakistani military and Taliban fighters in the province, he said.
"The provincial government has put the onus of responsibility on the soldiers of Sufi Muhammad. The key demand of the Pakistani Taliban was the establishment of the Dar-ul-Qaza; many people said they would even lay down their weapons in front of the Dar-ul-Qaza when it was instituted.
"There are fears that the whole thing could collapse if not handled carefully; we have reports that the military and the Pakistani Taliban have been beefing up their positions in Swat valley district as well [as Buner and Dir]."
The NWFP decision was announced on a day at least 18 people were killed in fresh clashes in the country's northwest.
The deaths followed an attack by pro-Taliban fighters on a Pakistani security checkpoint in the Mohmand tribal region, along the border with Afghanistan, early on Saturday.
"The Taliban attack was launched before dawn, troops retaliated and heavy fighting continued until early this morning," Major Fazal Khan, a local military spokesman, said.
Officials said that the dead included at least 16 fighters and two paramilitary soldiers.
Separately, in the neighbouring Bajaur district, armed men took over a house killing at least one civilian and injuring several women, security sources said.