He gave the order at a meeting with cabinet colleagues and security officials.
Israeli Prime Minister Ariel Sharon has ordered the army to enforce a no-go zone for Palestinians in northern Gaza to try to end rocket attacks on Israel.
It is part of a series of new measures Israel says it will take to stop Palestinians firing missiles.
Palestinians have launched scores of rockets at Israel since Israel pulled out of the Gaza Strip this summer.
A Palestinian official rejected the plan, saying security forces in Gaza had been told not to leave their posts.
Interior ministry spokesman Tawfiq Abu-Khusah said the Palestinian Authority (PA) would "not yield to Israeli dictates and attempts to impose the zone by fire and bombardment", Palestinian radio reported.
Longer range
Mr Sharon returned to work on Sunday after spending most of the week recovering from his stroke.
He gave the order at a meeting with cabinet colleagues and security officials.
"We must make sure that [Palestinian militants] won't act against us, this is my policy and my instructions," Israeli media quoted him as saying.
The move followed talks on Thursday in which the prime minister told the army to do everything possible to stop rocket fire from the territory.
Palestinian militants have been able to fire missiles deeper into Israel since Israel withdrew from Gaza in September.
A rocket attack on Thursday wounded four Israeli soldiers.
A Palestinian man was killed when the army responded by firing artillery shells at the launch site in a field it said was empty.
Officials said on Thursday that the zone would be about 2.5km (1.5 miles) deep and run along the northern and eastern edge of the Gaza Strip.
Pope Benedict XVI in Rome has made a plea for peace in the Middle East, as he celebrated his first Christmas Eve mass since becoming pontiff.
He spoke to thousands of people packed into St Peter's Basilica and watching on screens in the square outside. The mass was broadcast live to 46 nations.
Calling on Roman Catholics to think of those in Bethlehem, he said: "We wish to pray for peace in the Holy Land."
At noon on Sunday he will deliver his Christmas message to the world.
The BBC's David Willey says the Pope made an impassioned plea for peace in his homily on Christmas Eve.
The Pope appears very conscious that this glittering ceremony is viewed by millions of people all over the world, our correspondent says.