Palestinian President Mahmoud Abbas accepted the resignation of Prime Minister Salam Fayyad on Saturday, the official Palestinian news agency said.
Fayyad had offered his resignation in a letter to Abbas following weeks of sparring over Fayyad's handling of the government and an economic crisis afflicting the Israeli-occupied West Bank.
"The president told Dr. Salam Fayyad he accepted his resignation, and asked him to conduct the work of the government until a new government is formed," official news agency WAFA said.
Western diplomats had expressed dismay at the latest turmoil within the Palestinian Authority at a time when the United States is making a concerted effort to revive defunct Middle East peace negotiations and boost the local economy.
During a visit to the region last month, U.S. President Barack Obama praised Fayyad as a partner in peace, and Secretary of State John Kerry held private talks with the beleaguered prime minister this week, in a clear sign of support.
Fayyad, a former World Bank official, is widely credited with helping create the institutions needed if the Palestinians are to gain independence from Israeli occupation.
Widely admired abroad, including in Israel, Fayyad, however, failed to build a strong political base within the Palestinian territories, which left him vulnerable to attacks from Abbas's own Fatah party and the Islamist group Hamas, which governs in Gaza.