A government statement said members of the security cabinet decided Thursday's ruling by Israel's highest court was "unacceptable" and asked it to hold a fresh hearing on the issue.
The government announced last year it would not return bodies unless Palestinians in Gaza agreed to release the remains of two Israeli soldiers believed to have been killed in a 2014 war in Gaza.
Last week, responding to a motion filed by families of nine dead Palestinians, the court said Israeli law does not allow the bodies to be held, but gave the government six months to enact new legislation or hand the corpses to their families.
"Ministers made it clear that the bodies of the terrorists would not be returned and that the principles set out in the majority opinion of the judges were unacceptable," the government statement said.
"Legislative proceedings will not be advanced at this stage," until the court responds to the demand for a new hearing, it added.
The issue gained fresh traction last month when Prime Minister Benjamin Netanyahu signalled that Israel would not repatriate the bodies of five Islamic Jihad militants killed when the army blew up a tunnel stretching from the Gaza Strip into its territory.
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