Relatives of victims of one of the bloodiest attacks, when 21 teenagers were killed in a 2001 bombing outside a Tel Aviv night spot, have been demanding the right to sue for damages.
Last year the Israeli Supreme Court ordered the foreign ministry to decide on the matter.
The ministry said on Sunday that the Palestinian Authority "does not enjoy immunity from prosecution in Israel" over suicide bombings.
Arye Mekel, the ministry's spokesman, said the significance of the decision was that Israel did not recognise the Palestinian Authority as a state government.
Usually states are immune from prosecution in the courts of another country.
A senior Palestinian official rejected the decision.
Riad Malki, the Palestinian Authority foreign minister and government spokesman, said Israeli courts had no legal jurisdiction over the Palestinian Authority.
"This is a political issue, not legal or judicial one," Malki said.
"We had expected [the foreign ministry] to provide a positive atmosphere for the continuation of the peace process and negotiations. We regret such inclinations. We condemn them."