Palestinian Prime Minister Salaam Fayyad, a U.S.-educated economist, told reporters the call for a boycott is a protest against Israel's withholding of funds to the cash-strapped Palestinian Authority.
Israel is holding $100 million in taxes it collects on behalf of the Palestinians, based on an interim peace accord. It cut off the funds to protest the Palestinians' successful bid last month at the United Nations, which granted the Palestinians non-state observer status. Israel said the Palestinian move was an attempt to bypass peace negotiations. Palestinians deny that.
Israel has briefly withheld tax transfers on previous occasions to pressure the Palestinians.
The Palestinian Authority government in the West Bank uses the money to pay salaries to its tens of thousands of civil servants and security forces. Israel said it is using the money to pay down huge debts Fayyad's government owes to Israeli firms, including its electricity company.
Fayyad admitted a Palestinian boycott of Israeli goods would violate an interim peace agreement with Israel, in which the two sides pledged economic cooperation, but he justified the move because "the Israeli government is working against this agreement" by withholding tax funds.
Israeli Foreign Ministry spokesman Yigal Palmor said the Palestinians should "concentrate efforts on how to build their own economy, not how to boycott someone else's."
In the past, Fayyad called for a boycott of goods made in Israeli settlements, but that boycott appears to have had no impact. Palestinians oppose settlements because they are located on West Bank land they claim for a future state.
This is the first time Fayyad has called for a boycott of all Israeli goods, not just ones made in West Bank settlements. Such a boycott would severely limit goods on the Palestinian market, as Palestinians are heavily dependent on Israel for consumer products.
To recoup its losses from the Israeli fund cutoff, the Palestinians have turned to Arab countries to donate funds.
"We are trying to prevent the collapse of the Palestinian Authority," Fayyad said.