Contradicting an earlier announcement that his so-called National Salvation Government was ready to step aside, Tripoli's unrecognised prime minister Khalifa Ghweil urged his ministers not to stand down.
He threatened to prosecute anyone working with the new government.
"Given the requirements of public interest... You are requested to continue your mission in accordance with the law," Ghweil said in a statement.
The reason for the U-turn was not immediately clear but could suggest a split within the Tripoli authority.
Ghweil's administration seized control of Tripoli in mid-2014 with the support of powerful militia groups, forcing a government backed by Libya's internationally recognised parliament to flee to the country's far east.
An attempt by his authority to hold on to power in the capital could spark fresh unrest in a country already struggling to emerge from five years of violence since the 2011 overthrow of Moamer Kadhafi.
Sarraj's Government of National Accord was created under a power-sharing deal agreed by rival lawmakers in December.
The international community has pleaded with Libya's warring sides to stand behind the unity government, which is seen as vital to tackling a jihadist expansion and rampant people smuggling in the North African state.
But it has not yet been endorsed by the administration based in the far east, which has long claimed international legitimacy because it was appointed by the parliament elected in the last polls in 2014.
And the Tripoli authority's reversal will be seen as a major setback, after it had just yesterday issued a statement "ceasing the activities entrusted to us as an executive power" in order to "prevent bloodshed and divisions".
It also ordered the Central Bank and the Audit Bureau to freeze all state accounts immediately, except for salary payments to government employees.
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