After an urgent cabinet meeting to discuss the deal, reached late on Friday between the Islamists and parliament speaker Sharif Hassan Sheikh Aden on an unauthorised trip to Mogadishu, officials said the deal was unacceptable.
"The council of ministers rejected the agreement in its totality," Information Minister Ali Jama said in the government seat of Baidoa, about 250 kilometres (155 miles) north-west of Islamist-held Mogadishu.
"It has no value to us as a government," he told AFP, stressing, however, that the government was willing to talk to the Islamists but not under the agreement reached by Aden who Jama said had no standing to negotiate.
"The speaker does not have any right to negotiate peace with the Islamic courts on behalf of the government but I want to make it clear we are ready to talk without any pre-conditions," he said.
"We are ready to engage in meaningful talks."
The rejection raises new concerns about a descent into conflict, following the collapse of negotiations earlier this month in Sudan that had fuelled fears of conflict that could engulf the entire Horn of Africa region.
Government officials said they could not accept the agreement because it removes Kenya as a co-mediator for the peace talks and opposes the easing of a UN arms embargo.
"The government needs the embargo to be lifted in order to bring peace in this country," Jama said.
"The federal government is against any sort of mediation that does not involve IGAD," a senior official told AFP, referring to the Inter-Governmental Authority on Development that Kenya currently chairs.
But the Islamists said the government was unwilling to peace, but said they would deal with government officials willing to talk.
"The statement from the government means it is rejecting peace. It is saying that it is totally not interested in peace and they need the intervention of foreign forces to continue," the movement's spokesman Sheikh Abdurahim Ali Muddey.
"Anyway, we will continue to talk with those who are in favour of peace," said.
Muddey said the Islamists had invited the majority of the 275-lawmakers lawmakers into areas they control for talks "so the rest cannot stop the peace talks."
The last round of peace talks in Khartoum foundered because the Islamists demanded Kenya's exclusion as co-chair with the Arab League and the withdrawal of Ethiopian troops they say are in Somalia to protect the government.
Ethiopia, which admits to having several hundred military advisers helping the government, and Kenya both support the administration's call for Islamist-opposed regional peacekeepers and the easing of a UN arms embargo.
The deal reached on Friday between Aden and the Islamists specifically calls for the embargo not to be lifted and names the Arab League and Sudan as mediators, both of whom the government accuses of pro-Islamist bias.
Aden is one of few politicians respected by both sides but he has clashed with the government over how to deal with the Islamists, who seized Mogadishu from warlords in June and now control much of southern and central Somalia.
He said on Saturday that he hoped the government would still return to the talks that many believe may be the only way to head off a full-scale war between the two sides whose forces are facing off outside Baidoa.
"Who heads the peace talks is not an issue, but who advances peace matters to the people of Somalia," Aden told AFP. "I am hopeful the Islamists and transitional government leaders will respect the call for sincere dialogue."
He travelled to Mogadishu on Sunday with 40 of the 275 members of the Somali parliament in the hope of preventing the November 1 failure of the Khartoum talks from sparking war that could have disastrous regional consequences.
After nearly a week of talks, he and Islamist officials announced late on Friday they had signed a deal calling for an immediate halt to hostilities, actions that could raise tension and a new round of peace talks.
Somalia has been without a functioning central authority since the 1991 ousting of strongman Mohamed Siad Barre and the two-year-old transitional government has been unable to assert control.
It is increasingly challenged by the Islamists, some of whom are accused of Al-Qaeda links, who seized Mogadishu from warlords in June and now control much of southern and central Somalia.

Copyright AFP (Agence France-Presse), 2006