The Islamic Jihad Movement said it will not join the formal ceasefire that has been in effect in the Gaza Strip since the end of 2006.
"We have not assumed any obligations. Israel must first cease the occupation and stop arresting our citizens," Palestinian media quoted Ahmed Harazi, an Islamic Jihad leader, as saying.
The movement's avowed goal is the destruction of Israel and its replacement with a Palestinian Islamic state.
This group defines jihad as acts of war against Israelis. Palestinian Islamic Jihad also opposes many other Arab governments, whom they see as being insufficiently Islamic and too Western.
Another militant group, Al-Quds brigades, Islamic Jihad's armed wing, also said attacks against Israel will continue.
The group has claimed responsibility for numerous militant attacks in Israel, including suicide bombings.
Israel said Wednesday it was not ready to meet the demands of Palestinian militants holding an Israeli serviceman.
The abduction of Corporal Gilad Shalit, 20, in June 2006 claimed by three Palestinian militant groups, triggered a new wave of violence in the region as Israel sent troops into Gaza to secure his release.
Shalit's release is considered a crucial aspect in peace talks between the Israelis and Palestinians.
"Israel cannot pay whatever price is demanded by Gilad Shalit's abductors," local radio quoted Prime Minister Ehud Olmert as telling the parliamentary commission on foreign affairs and defense.
Olmert expressed dismay at the number of prisoners Palestinians want freed from Israeli jails in exchange for the corporal.
"The list disappoints us and creates expectations we cannot meet," the Ynet Web site, connected with the Yedioth Ahronoth tabloid, quoted the prime minister as saying.
Media have put the number of names on the list at more than 300, including high-ranking activists of Palestinian groups serving terms for terrorism.
