Israel will not return the bodies of Palestinian militants to their families, but will bury them instead, officials said.
Israel said it was taking measures to ensure the return of Israeli remains from Palestinian territory.
But the country's security cabinet announced the move after the release of mocking videos from the armed wing of Hamas.
The decision will now become a permanent change in policy, it said.
The two video clips published by the Hamas military wing show a mock birthday for Oron Shaul, who Israel said was killed during the Gaza War in 2014.
In one, his face has been digitally inserted over someone else's body, bound and in army fatigues.
He is visited by the Israeli Prime Minister Benjamin Netanyahu in a clown's costume, who blows out the candles on a birthday cake.
Sgt Shaul, 21, was one of seven soldiers reported killed in an incident in Shejaiya, near Gaza City.
But Hamas has never confirmed that Sgt Shaul is dead.
After the meeting of the security cabinet, the prime minister's office released a brief statement on the decision.
"The security cabinet discussed ways to effect the return of fallen soldiers and of civilians held in the Gaza Strip ... and decided that (the bodies of militants) should be buried, rather than returned," the statement said.
Bodies buried under the new policy could be exhumed and returned later as part of exchanges.
In September 2016, Israeli officials said that Hamas had rejected the offer of an exchange for both prisoners and the remains of fallen citizens.