The official said the move was in response to what Israel has called a "provocative" Palestinian bid to join United Nations agencies.
Israel blames the Palestinians for the breakdown in the US-brokered peace talks.
Under Netanyahu's order, cabinet ministers and their ministry directors can no longer meet their Palestinian counterparts, though lower-level contacts will continue. The sides frequently work on day-to-day issues, including the environment and security.
The government official said Israel's leading peace negotiator, Tzipi Livni, would be an exception from Netanyahu's order.