"We will not be able to pursue contacts with the government or its members," Olmert told the cabinet. "We expect that the international community will not be misled by the creation of the coalition government."
The international community imposed a crippling financial embargo on the Palestinian Authority over the Hamas government's refusal to recognize Israel, renounce violence and accept past agreements.
The Quartet - a group of Middle East peacemakers – has maintained that the aid embargo will remain in place so long the international community's demands are not met.
With the inauguration of the new unity government over the weekend, the US and Britain signaled they would be willing to talk to non-Hamas ministers.
"We will continue our policy of not having contacts with members of foreign terrorist organisations," said Micaela Schweitzer-Bluhm,
"In terms of individuals who are not members of foreign terrorist organisations, we will not suspend contacts with individual Palestinians solely based on their participation in the unity government but we will make individual decisions based on our evaluation of the situation," she added.
The new government, which will be headed by Hamas official Ismail Haniyeh, includes ministers from Hamas and Fatah as well as from other parties.
Haniyeh and Palestinian Authority President Mahmoud Abbas delivered speeches heralding different agendas during the inauguration of the new government Saturday.
While Abbas called on Israel to engage in serious peace talks with the new Palestinian government, Haniyeh said his government would support armed resistance to Israel and the right of return for thousands of Palestinian refugees.
Education Minister Yuli Tamir of Labor called on Israel to come up with a peace initiative of its own, saying the Jewish State should adopt a peace plan "in which we are leading instead of being led."
The hawkish Minister for Strategic Threats Avigdor Lieberman said Friday that Israel should sever contacts with Abbas and the new government.
Science, Culture and Sports Minister Raleb Majadle told the cabinet that Israel should accept the Saudi peace initiative which offers normalization with the Jewish State in return for a full withdrawal from the West Bank.
"At the Arab League meeting in Riyadh in two weeks, Arab countries will offer us normalization in return for a full withdrawal from the territories. We do not need to confront the world but to go with it," he said.
Most ministers supported Olmert's position that Israel should not agree to talk to the new Palestinian government so long it had not clearly renounced violence.
Reuters contributed to this report