Jabal al-Mukabbar, based in Arab East Jerusalem claimed that Israeli-born Khatib, who also played as an international for Palestine, walked out on them in 2012 to join Hapoel Haifa without telling them.
A document obtained by Reuters said FIFA's Dispute Resolution Chamber ruled Hapoel Haifa and Khatib must pay Jabal al-Mukabbar 450,000 shekels ($113,500).
It is thought to be the first time an Israeli club has been ordered to compensate a Palestinian side in a dispute.
Movement of players between Israeli and Palestinian clubs is very rare. Despite living side by side the respective teams do not interact as Israel are members of European soccer's governing body, UEFA, and the Palestinians play in Asia.
Khatib was born in the Arab town of Shfaram near Haifa in northern Israel.
He has spent most of his career in Israel but between 2009-2012 he played for Jabal al-Mukabbar and Hilal al-Quds, another Palestinian club based in East Jerusalem.
Khatib currently plays for Israeli second division side Ahi Nazareth, one of Israel's top Arab teams.
He has played six matches for Palestine and has scored two goals.
(Writing by Ori Lewis, editing by Ed Osmond)
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