"President Abbas has accepted the resignation of Hamdallah after he refused to work with two deputies," a senior source told AFP, speaking on condition of anonymity.
"He asked him to stay on in a caretaker role until he choses 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 deputies working directly under him.
"Hamdallah initially agreed to withdraw his resignation (on Friday) but he insisted yesterday 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.