The law, under which offenders could face up to five years in jail or a fine of up to $14,000, was signed by Mahmoud Abbas, the Palestinian president, on Monday.
The move is part of a campaign launched earlier this year to clear Palestinian markets of settlement goods and encourage other countries to ban trade with companies 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,” Hassan al-Awri, Abbas’s legal adviser, told the Reuters news agency.
The campaign does not include products from Israel proper, which Palestinians rely on.
Palestinian government officials estimate the annual sale of goods from Israeli-run companies in the settlements totals up to $500 million per year.
Monday’s ban came nearly six months after the Palestinian Authority called on the public to boycott several large supermarket chains in the West Bank for carrying Israeli products.
The decision targeted upscale markets in the West Bank city of Ramallah, in an attempt to pressure the stores to discontinue the sale of fruits and vegetables grown and processed in Israeli settlements.
Palestinians consider these settlements the most serious threat to their aspirations for statehood.
In December of last year, Britain called on UK supermarkets selling goods from the West Bank to state explicitly on labels whether the content had come from Israeli settlements or Palestinian-owned farms.
The recommendation, issued by the Department for the Environment, Food and Rural Affairs (Defra), is not a legal requirement.
But Israeli officials and settler leaders reacted angrily to the decision, saying it would lead to a boycott of their goods.
Until now, food has been labelled “Produce of the West Bank”, but Defra’s voluntary guidance said labels should give more precise information, like “Palestinian produce” or “Israeli settlement produce”.
Products from the Israeli settlements include cosmetics, pharmaceuticals, fruit and textiles.
European Union law already requires a distinction to be made between goods originating in Israel and those from the occupied territories, though pro-Palestinian campaigners say this is not always observed.