"President Abbas today issued a law banning trade in goods made in settlements," Abbas's legal adviser Hassan Al-Awri told Reuters.
Offenders will face jail sentences and fines that vary according to the amount of settlement goods found in their possession, he said.
The move is part of a campaign launched in January to "cleanse" Palestinian markets of settlement goods.
It is also aimed at encouraging European Union member states to ban trade with enterprises in the settlements, which are considered illegal under international law.
"There's an international consensus that the settlements are illegal and therefore it is unacceptable to support them," al-Awri said.
The campaign does not include products from Israel proper, which Palestinians rely on. Campaigns by some local groups to boycott all trade with Israel have had very little success.
Palestinian officials estimate that Israeli-run companies in the settlements sell goods worth $500 million per year into the West Bank market, from construction materials to nuts.
Campaigners believe that cutting off this trade will undermine settler viability in the Israeli-occupied territories that Palestinians want for a state.
