After months of deadlock and more than a year after Hamas defeated Fatah in the Palestinian elections, the two main factions started the process of forming a new national unity government.
President Mahmoud Abbas appointed Ismail Haniya to form the government after Haniya resigned as prime minister in a formal move enabling him to accept the new designation.
He also presented the resignation of the current Hamas-led cabinet on Thursday night.
These moves come in accordance with the agreements reached by the rival Fatah and Hamas movements in Mecca, Saudi Arabia, last week.
Speaking at a press conference in Gaza City with Haniya, Abbas said the new government must "respect" international and Arab states agreements, including previous PLO agreements with Israel. Haniya agreed to the appointment.
Haniya said that "now I will start my negotiations with all political powers and factions".
According to the agreement reached in Mecca, the new coalition government will also include smaller Palestinian factions in addition to the larger Hamas and Fatah groups.
The announcements came after a meeting between the two leaders earlier in the evening in Abbas' offices in Gaza City.
While most issues were decided in Mecca, the two sides have yet to agree upon who will be the interior minister, a key post because it involves control over security forces, and the identity of the foreign minister.
The two positions are set to be filled by independents agreed upon by the factions.
Also, the sides must agree on who will be deputy prime minister - a role designated for a member of Fatah.
It remains unclear whether the new government will formally recognise Israel, a key demand of the international community to end the boycott of the Palestinian government along with agreeing to past Israeli-Palestinian interim agreements and renounce violence.
The crippling boycott has been in effect since Hamas took power in March last year following its victory in the legislative elections.
The Palestinian factions hope the unity government will help end the sanctions, but officials fear that if it does not formally recognise Israel, the new government may be ostracised as well.
Israel did not yet formulate an official stand on the new government, with officials saying they are still studying the matter. Prime Minister Ehud Olmert is currently on a diplomatic visit to Turkey.
According to Palestinian law, Haniya has three weeks to form a new government, a period which can be extended by another two weeks.