Palestinian Foreign Minister Nasser Al-Kidwa set off a storm by declaring that his government has no intention of disarming militant groups, as demanded by the internationally-backed "Roadmap" peace plan.
"As long as there is occupation, we don't think that there should be an end of arms, " Mr. Al-Kidwa told Israel Radio.
It was the first time a senior Palestinian official said publicly that the government would not fulfill its key commitment under the Roadmap. Until now, Palestinian leader Mahmoud Abbas has said that he would negotiate with militant groups, with the long-term goal of collecting illegal weapons.
Israeli officials are furious.
"The refusal of the Palestinian Authority to disarm terror groups drops a cluster bomb on the peace process," Mr. Olmert told Israel Radio.
"Either they will fight terrorism or we will," he said. Officials say Israel will not open negotiations on Palestinian statehood, until there is a crackdown on militants.
Palestinian analyst Wadia Abu Nasser says Mr. Abbas is not strong enough to take on the powerful Islamic militant group, Hamas.
"The Palestinian security systems have no superiority, in terms of armament over Hamas," said Mr. Nasser.
The Palestinian Authority is also taking the heat from human rights groups, after it carried out the death penalty for the first time in four years. Four men convicted of murder were executed, three by hanging and the fourth by firing squad. Eleven other Palestinians are on death row, including some accused of collaborating with Israel. Palestinian officials say the aim is to rein in lawlessness in the West Bank and Gaza Strip.