The four candidates were among a total of 10 Hamas members detained by Israeli police in Jerusalem after the militant group made good on its vow to defy the campaign ban.
Six Hamas activists were picked up in Jerusalem's Old City, while another four were detained when police raided the radical group's Jerusalem campaign headquarters and closed it down.
Among the four candidates detained in the Old City was Sheikh Mohammed Abu Tir, who is number two on the Hamas slate.
Jerusalem police spokesman Shmulik Ben Ruby told news agency AFP the office was "the centre of Hamas's activity in East Jerusalem, which had all the money and the power to run Hamas's election campaign".
The Palestinian leadership, whose ruling Fatah faction is facing a tight race with Hamas in the January 25 poll, slammed the uneven playing field being imposed by Israel and urged it allow electioneering to take place unhindered.
Palestinian chief negotiator Saeb Erakat said the ban was contrary to past arrangements in which all candidates had been allowed to campaign.
"Israel has no right to forbid any candidate from campaigning in East Jerusalem," Mr Erakat told news agency AFP.
"We have asked the international observers to ensure that the campaign will take place on the same lines as in 1996 and 2005 which allowed for the candidates from every list to move freely. This includes Hamas," he said.
Voting approved
Israel's Acting Prime Minister Ehud Olmert formally submitted to cabinet the proposals to allow Arabs in East Jerusalem to vote.
"I propose to the cabinet that the election in East Jerusalem be conducted on the same basis as in 1996 and 2005," Mr Olmert said.
Palestinians living in East Jerusalem, occupied and then annexed by Israel in 1967, were able to vote in the last parliamentary elections a decade ago and in last January's presidential election in post offices.
But Mr Olmert said Israel would not allow Hamas to campaign in East Jerusalem, which Israel considers part of its "undivided eternal" capital, a position not recognised by the international community.
"Under no circumstances will we permit Hamas to enter Jerusalem and carry out electioneering," he said.
Israel had initially threatened to block all voting in East Jerusalem over the participation of Hamas, the group behind the majority of attacks during a five-year Palestinian uprising and which refuses to recognise the Jewish state's right to exist.
Israel's outgoing Foreign Minister Silvan Shalom, whose right-wing Likud party quit the cabinet over the issue, said there was no way the government could stop Hamas.
"Nobody will be able to stop Hamas militants campaigning and going around from mosque to mosque," he said.
In an interview with Israel's Haaretz daily, Hamas candidate Abu Tir said the movement had made a "strategic shift" with its decision to field candidates for the first time and said it might even condone future talks with Israel.
"We are not saying 'never'," said Abu Tir, a onetime Hamas military commander who was only freed from jail in Israel last year.
"The question of negotiations will be presented to the new parliament and, as with every issue, when we reach the parliament it will be discussed and decided in a rational manner."