Abbas, the leader of Fatah, also outlawed the fighting forces loyal to Hamas.
"Hamas must decide what their objective is - is it power, is it Israel's destruction, or is it peace for the Palestinian people? Send us your views
Chris, Stockholm, Sweden
If you are in the Gaza Strip, you can also mail your opinions to:
"The executive force and Hamas militias are declared outside the law for having carried out an armed rebellion against Palestinian legitimacy and its institutions," he said in a decree.
At the swearing in ceremony, Fayyad, an independent, said: "I swear by God to be loyal to the fatherland, the people and the national heritage, to respect the laws and the constitution and to watch over the people's interests.
"We are going to work with clean hands, systematically."
Addressing the Palestinians in Gaza, he said: "You are in our hearts, and the top of our agenda. The dark images, the shameful things that are alien to our traditions ... are not going to stop us."
Early on Sunday, the Israeli prime minister said the formation of the Palestinian government would create a "new opportunity" for peace moves.
Israel will recognise a Palestinian government that does not contain ministers from Hamas, Ehud Olmert said before departing for a visit to the US.
US-educated economist widely respected for his efforts to clamp down on corruption.
Served as finance minister from 2002-2005 and in the Palestinian unity government in March 2007.
Israeli newspaper Haaretz dubbed him "everyone's favourite Palestinian."
Fayyad declined an offer to join the Hamas government.
Previously worked for the World Bank and International Monetary Fund (IMF).
Briefly worked at the Arab Bank as its chief representative in the West Bank.
Received a bachelor of science in engineering from the American University of Beirut.
Obtained a masters in business administration and a doctorate in economics from the University of Texas.
"A Palestinian government which is not a Hamas government is a partner and we will co-operate with it."
Hamas, however, swiftly branded the new emergency government "illegitimate".
The new ministers took the oath of office before Abbas in the presidential compound in Ramallah in the Israeli-occupied West Bank.
Fayyad, 55, is a former employee of the International Monetary Fund and the World Bank.
The economist is known for his efforts to clamp down on corruption and to promote transparency in reportedly questionable Palestinian finances.
He will also hold the finance and foreign portfolios in the cabinet.
Abbas appointed Fayyad after fighters from the Hamas movement overran security services loyal to the president in the Gaza Strip.
In another boost for Abbas, a US envoy told Abbas during a meeting in the West Bank on Saturday that the US would lift a direct ban on aid to the government once the new administration was announced.
Jacob Walles, the US consul-general in Jerusalem, said: "I expect that we are going to be engaged with this government.
"I expect that early next week. There will be some announcements in Washington, specifically about our assistance and about the financial regulations."