Ghazi Jabali was kidnapped earlier in the day by militants who exchanged gunfire with his bodyguards on the highway 3 miles south of Gaza City. Two bodyguards were wounded.
Palestinian Authority officials involved in the negotiations said they had secured his release, but Jabali was not immediately seen in public. No details of the agreement for his freedom were known.
The men broke the car windows, then kidnapped the police official and took him to the Bureij Refugee Camp in the central area of the Gaza Strip, residents of the camp said.
The refugee camp residents said the kidnappers were members of the Palestinian Popular Resistance Committee, a group of militants based in Gaza.
Meanwhile, at the urging of Yasser Arafat's top advisers, a Palestinian militant group has banned the chief U.N. Mideast envoy from entering the Palestinian territories or meeting Palestinian officials, militant leaders said Friday.
Arafat's office has already made it clear that Terje Roed-Larsen — long considered close to Arafat and sympathetic to the Palestinian cause — was no longer welcome in the West Bank and Gaza Strip.
A spokesman for the Al-Aqsa Martyrs Brigades, a group with ties to Arafat's ruling Fatah movement, said on condition of anonymity that Arafat aides asked the group to release a statement barring Roed-Larsen from the West Bank and Gaza Strip.
But another Aqsa official, in a phone call to the Associated Press, denied his group was ordered by Arafat to release the statement.
"The statement reflects our views," said Abu Amin, an Aqsa leader in the West Bank town of Jenin. "It has nothing to do with Yasser Arafat."
If Arafat did issue the order, it would seem to contradict his claim that he does not control militant groups, reports CBS News Correspondent Robert Berger.
Thursday's statement said Roed-Larsen is also forbidden to meet with Palestinian officials, including Prime Minister Ahmed Qureia.
Roed-Larsen could not immediately be reached for comment.
Palestinian officials were infuriated earlier this week when Roed-Larsen said at a U.N. Security Council briefing that Arafat was blocking vital reforms within the Palestinian Authority and accused him of hindering peace moves.
"People in Arafat's office called us and told us that Larsen's statements are just another part of the conspiracy to delegitimize Arafat," said the Al Aqsa official who could not be quoted by name.
"They told us Larsen is now with Israel and America. ... They asked us to intervene to stop him in his tracks," he said.
In other developments, New Zealand has imposed diplomatic sanctions on Israel after it caught two alleged Mossad agents trying to obtain a New Zealand passport by fraud.
"Israel is very sorry about the decision that was taken by the government of New Zealand," Israeli Foreign Minister Silvan Shalom said.
Israel has not admitted that the Israeli suspects are Mossad agents, but if they are, it's another embarrassing blunder for a spy agency regarded as on of the best in the world, reports Berger.
The U.N. General Assembly Friday was to take up a draft resolution demanding that Israel obey a World Court ruling and tear down its West Bank barrier. Correspondent Robert Berger reports from Jerusalem.
Since the Islamic bloc has an automatic majority in the U.N. General Assembly, Israel is resigned to a resolution ordering it to tear down the West Bank security barrier. But Israel won't cooperate.
"I think it's very simple, no terror, no need for a fence," said government spokesman Jonathan Peled.
The resolution is not expected to get through the Security Council.
The attack on Jabali could be part of an internal struggle among Palestinian factions and leaders vying for power ahead of Israel's planned withdrawal from the Gaza Strip.
Jabali escaped harm in April when his home was attacked and militants planted a bomb at his door.
Earlier this year, a group of men loyal to Mohammed Dahlan, the former Palestinian security chief, burst into Jabali's office and assaulted him.
Following Roed-Larsen's comments, Arafat's top adviser Nabil Abu Rdeneh described the U.N. envoy as "useless," and said he should not return to the Palestinian territories.
Despite the warnings, the Palestinian observer at the United Nations, Nasser Al-Kidwa, said Roed-Larsen's legal status has not been decided and would be discussed with U.N. Secretary General Kofi Annan after he returns to New York next week.
Al-Kidwa refused to say whether the Palestinians will ask Annan to remove Roed-Larsen, but he made it clear that comments by Rdeneh and others reflected "real Palestinian anger" at the U.N. envoy's positions.
An Aqsa leader known as Abu Mujahid, said Friday the statement also was aimed at Palestinian officials who they claim are a part of a larger conspiracy to undermine Arafat.
"We feel that Abu Ala (Prime Minister Qureia), among others in the Palestinian Authority are part of this conspiracy against the president," Abu Mujahid said.