A city project marking every street name and house number in this temporary Palestinian capital has stirred an international dispute and exposed yet again how the Israelis and Palestinians live in sealed narrative bubbles and seem almost incapable of hearing one another.

The dispute started last week when an Israeli television crew came through. As it passed the office of Prime Minister Salam Fayyad and the construction site of the new presidential compound, it noticed that a main road bore new blue signs declaring it Yahya Ayyash Street.

Mr. Ayyash was considered the most cunning of the Hamas bomb makers in the 1990s, known to friend and foe as the Engineer, whose work led to the deaths of scores of Israelis on buses and crowded city streets. He was assassinated by Israel in what its security forces viewed as poetic justice: they slipped him a booby-trapped cellphone and when he answered it one day in Gaza, they exploded it against his head.

The street signs not only honor Mr. Ayyash, but also offer a concise biography in Arabic and English: “Yahya Ayyash 1966-1996. Born in Rafat (Nablus), he studied electrical engineering in Birzeit University, he was active in Al Qassam Brigades, and Israel claimed that he was responsible for a series of bomb attacks, and he was assassinated in Beit Lahya (Gaza Strip) on 5/1/1996.”

Within an hour of the Israeli television report on the street name, the office of Israeli Prime Minister Benjamin Netanyahu issued a furious condemnation, calling it a “shocking incitement.” By last Friday, the State Department had issued a similar statement, saying that the “glorification of terrorists” harmed peace efforts and had to stop.

The Palestinian Authority promptly replied, saying that the attention Mr. Netanyahu was paying to a street sign was an effort to divert attention from his real concern — international pressure against the construction of Jewish settlement units in East Jerusalem.

After noting that street names are chosen by municipalities, and that Ayyash Street dates back years, the Palestinian Authority attacked the names of hundreds of Israeli streets and institutions saying they honored men who had “committed crimes against Palestinians.” Among those it considered beyond the pale was Menachem Begin, the former prime minister and Nobel laureate.

As the Palestinian government statement put it, “Former Israeli Prime Minister Menachem Begin, who was responsible for the murder of innocent Palestinians in 1948 and is infamous for his role in the Deir Yassin massacre, has museums, streets and many public spaces across Israel named after him. Most were done through government funding.”

This latest exchange follows American and Israeli outrage last month when, during the visit of Vice President Joseph R. Biden Jr. to Israeli and Palestinian leaders, a ceremony was planned to mark the naming of a square in the neighboring town of El Bireh for Dalal Mughrabi, who helped hijack a bus in 1978 in which 37 Israelis were killed. Following an American request, the ceremony was called off although an unofficial one occurred anyway. Still, the square bears no sign.

Ghassan Khatib, spokesman for the Palestinian Authority, said by telephone that he personally considered it inappropriate to name a street after someone like Mr. Ayyash. But he said it was inappropriate for the central authority to intervene in such city affairs without a clear set of guidelines agreed to by both sides on what constitutes incitement.

“The recent killing of four innocent Palestinians by Israeli forces is incitement,” he said. “The checkpoints, humiliation and harassment of the occupation cause far more incitement among our people than any street name. And obviously people have different views of who is a hero.”

Itamar Marcus, director of Palestinian Media Watch, an Israeli organization that monitors Palestinian society, said the honoring of Mr. Ayyash is widespread. In 2007, for example, Al Quds University, which many consider a moderate campus, devoted a week to the 11th anniversary of his death, including an art competition.

“The Palestinians say we need a clearer definition of incitement,” he said. “To me it is clear. Anything that is going to create hatred among the population or create a desire for violence has to be considered incitement. Turning of terrorists into heroes by naming streets and sporting events after them is the ultimate incitement. It doesn’t make sense to bring in other issues, like how Israel fights terror, and call it incitement. You can say that policy is no good but not under the umbrella of incitement.”

Ahmad Abu Laban, the city director of Ramallah, said in an interview that the city began installing signs on 500 streets and numbers on houses last July and would finish in the coming months a project that would include printing new city maps. He said that the street names were chosen by a local committee several years ago and that he had no regrets.

“I will not accept anybody giving me orders to remove any names,” he said. “We are proud of our martyrs.”