Palestinian president Mahmud Abbas accepted the resignation of prime minister Rami Hamdallah on Sunday after just over two weeks on the job, plunging his government back into crisis.
It was the second time in 10 weeks that a Palestinian prime minister had tendered his resignation over a power dispute, and Abbas now has 35 days to find a replacement.
The independent academic had baulked at his limited authority within a government still dominated by the president's Fatah movement.
The rival Hamas movement that controls Gaza said the crisis highlighted the need for a national unity government to take the helm of the West Bank-based Palestinian Authority.
"The president of the state of Palestine Mahmud Abbas today accepted the resignation of prime minister Rami Hamdallah and asked him to continue in a caretaker role until the formation of a new government," presidential spokesman Nabil Abu Rudeina told the official WAFA news agency.
Earlier, a senior source told AFP the decision had been taken when Abbas and Hamadallah met during the morning for their third meeting in 48 hours.
"President Abbas has accepted the resignation of Hamdallah after he refused to work with two deputies," the source told AFP.
"He asked him to stay on in a caretaker role until he chooses someone else to form a new government."
The crisis erupted on Thursday when Hamdallah unexpectedly tendered his resignation over what government officials said was a "power struggle" resulting from Abbas's decision to install two deputy premiers.
Hamdallah had withdrawn his resignation on Friday during what a high ranking government official said was a "positive" two-hour meeting with Abbas.
They met for another 90 minutes on Saturday evening, but by Sunday morning, the situation was beyond repair.
"Hamdallah initially agreed to withdraw his resignation but he insisted yesterday (Saturday) during a meeting with the president on either not having any deputies, or having deputies with restricted powers," the source said.
"This led to a sharpening of the dispute over the powers of the prime minister, which ended up with the president accepting his resignation."
At the heart of the crisis is a dispute over the division of responsibilities within government.
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Hamdallah, who was named to the post of premier by Abbas on June 2 and sworn in at the helm of a new government four days later, had been incensed by the president's decision to name the two deputies, sources in his office said.
During his talks with Abbas on Friday, Hamdallah had made clear he wanted "clear and defined powers as prime minister and for his deputies, based on the law, so his authority is not encroached on," an official said.
Ziad Abu Amr and Mohammed Mustafa were sworn in as deputy premiers on June 6, the first time the post had been created in the Palestinian government.
Mustafa, who heads the Palestine Investment Fund and was himself considered as a candidate for the top job after the resignation of Salam Fayyad as premier in April, was handed the role of economic adviser.
Fayyad's resignation too was triggered by a power struggle with Abbas, in his case over the finance portfolio which he long held himself.
Hassan Khreishe, deputy speaker of parliament, said Hamdallah's resignation highlighted a major problem within the political system.
"There is a major crisis within the Palestinian political regime and this shows just how big it is," he told AFP.
"Hamdallah was brave to demand his rights under the Basic Law and he resigned after he discovered he has no authority, because he has a deputy for political issues and a deputy for economic issues, so what does he have if both of these are taken from him?"
He said the problem would not be solved simply by appointing a new prime minister.
"It is not important who comes next. Whoever comes after Hamdallah won't solve the crisis. There is no institution which oversees what the presidency does," he said, saying the regime would be run "by Abbas alone."
A similar reaction came from Gaza's Hamas rulers, with spokesman Fawzi Barhum calling for an overhaul of the political system.
"This reflects the depth of the real crisis facing the Palestinian Authority's institutions as a result of the many power centres and power struggles," he said.
"This resignation should draw a line under this phase of deterioration in the Palestinian Authority's institutions and mark a phase of rebuilding based on national and democratic values.
"This will not be achieved until the full implementation of the Cairo agreement, including the formation of a government of national consensus," he said.
He was referring to a clause in an as-yet unfulfilled 2011 unity agreement between Hamas and Fatah.