Abbas "is leaning towards dismissing Fayyad from the head of the government and forming a new one," a member of Fatah's Revolutionary Council told AFP late on Friday, speaking on condition of anonymity.
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He said the key factor was disagreement over the resignation of the West Bank-based Palestinian Authority's finance minister, which Abbas refused to accept but which Fayyad, a US-educated economist, agreed to.
Nabil Qassis, a former president of the Bir Zeit university near Ramallah who joined the government in May 2012, announced on March 2 that he was resigning, without giving a reason. Abbas was abroad at the time.
"Abbas informed Fayyad that if Nabil Qassis did not return to the finance ministry... Abbas would dismiss his government and form a new one," the official said.
The Revolutionary Council -- one of the secular Fatah's governing bodies -- also officially criticised Fayyad's government for the first time on Friday.
"The policies of the current Palestinian government are improvised and confused in many issues of finance and the economy," it said in a statement.
"The Revolutionary Council again calls for a review of the government's functioning and policies, and rejects taxes being blindly imposed," the statement added.
Fatah also denounced a Fayyad government proposal to shut down a Palestinian fund set up to fight competition from goods produced in Jewish settlements.
The premier has had to deal with a wave of social unrest in the West Bank over price rises and austerity measures aimed at reducing the budget deficit.
Fayyad, 61, a political independent and former International Monetary Fund and World Bank official, was first appointed Palestinian prime minister amid the deadly takeover by the Islamist Hamas of the Gaza Strip in June 2007.
Hamas