Ismail Haniya had said the only way out of the current crisis was for all parties to restore calm through a mutual cessation of hostilities.
Officials in the Israeli PM's office said there would be no truce until a captured Israeli soldier was free.
Earlier Israel said its troops had left their positions in northern Gaza.
Dozens of Palestinians and an Israeli died in two days of fighting there.
Meanwhile just east of Gaza City, Palestinian sources said a six-year-old girl, her brother and their mother were killed in an air strike on a house.
Witnesses said an Israeli missile hit the house. Israel said its inquiry was continuing but it did not believe it was responsible for the incident.
Military operations in Gaza began after an Israeli soldier, Cpl Gilad Shalit, was captured two weeks ago.
Israeli forces remain in the south of the territory, as well as east of Gaza City, where they clashed with gunmen on Saturday. At least three Palestinians died in the clashes.
Officials in Israeli Prime Minister Ehud Olmert's office said he would not agree to a truce unless Hamas first released Cpl Shalit.
"We do not hold negotiations with terrorists," an unnamed official told AFP news agency.
"They must first return the kidnapped soldier unharmed and cease their fire.
"We will decide on our next moves according to the steps taken by the Palestinian government."
Mr Haniya said he was still committed to the proposal despite the rejection.
"We presented it out of conviction... and we hope the leaders of the occupation will show reason and logic," he said, quoted by AFP.
His Hamas-led government has also urged Israel to open negotiations over the fate of Cpl Shalit.
The Israeli army says all of the forces that entered northern Gaza late on Wednesday have left the town of Beit Lahiya and are now back in Israel.
The BBC's Wyre Davies in Gaza City says the withdrawal is significant, because the areas has been the scene of heavy fighting.
Our correspondent adds that it is not clear why Israel has decided to leave now, but that it should ease tensions.
This leaves Israeli forces in the southern Gaza strip, as well east of Gaza City.
Cpl Shalit was seized in a border raid on 25 June
The latter area was the scene of the latest Israeli operation early on Saturday.
Troops, backed by helicopter gunships, moved on the eastern outskirts of Beit Hanoun and the main commercial crossing at Karni. The area is a Hamas stronghold.
Israeli military sources said this was a limited operation, aimed at uncovering tunnels under the border.
Earlier, Hamas confirmed for the first time that Cpl Shalit, 19, was alive and was being treated well and humanely.
Israel's incursion into Gaza is its biggest military operation there since it ended its 38-year occupation nine months ago.Last Mod: 20 Eylül 2018, 18:16