Fayyad announced the half pay measure at a Cabinet meeting on Tuesday. The Palestinian Authority took the same measure in July. Last month it paid full salaries but said its funding crisis had not been solved.
The Palestinian Authority pays salaries to 150,000 people in the West Bank and the Gaza Strip and monthly allowances to another 75,000 people.
A Palestinian official, speaking on condition of anonymity, said the aid-dependent authority was facing an unprecedented financial squeeze on funding from Arab states which are failing to meet commitments to provide support.
The financial crisis has highlighted the fragility of the PA as President Mahmoud Abbas embarks on a diplomatic offensive to secure UN endorsement for Palestinian statehood.
The leadership has called for popular protests to add weight to the diplomatic initiative. However, the official suggested turnout at such demonstrations could be hurt by the financial crisis.
