In a national TV address, Jammeh said on Tuesday the measure was necessary because of "the unprecedented and extraordinary amount of foreign interference" in a December 1 presidential vote, which he lost to opposition leader Adama Barrow.
Jammeh also cited external interference in "the internal affairs of The Gambia and the unwarranted hostile atmosphere threatening the sovereignty, peace, security and stability of the country".
The state of emergency, which is supposed to last 90 days, bans "acts of disobdience" and "acts intended to disturb public order".
A former coup leader who has ruled the small West African country since 1994, Jammeh initially conceded defeat but a week later contested the poll's results stating irregularities.
Barrow, who is currently in Senegal, is scheduled to take office on January 19.
He insists his inauguration will proceed as planned.
"The decision to declare a state of emergency was taken by the national parliament, but the only people who are sitting in parliament are the members of Jammeh's political party," Al Jazeera's Nicolas Haque, reporting from neighbouring Senegal's capital, Dakar, said.
Haque said the declaration of the state of emergency raised concerns about freedom of speech and arbitraty arrests in the country, as well as the potential implementation of a curfew and the closure of borders.
"Gambia, as of right now, is effectively on lockdown," Haque said.
"What is clear is that the state of emergency is supposed to last 90 days, which entails that Jammeh wants to stay in power beyond Thursday's inauguration."
Jammeh is refusing to step down despite international pressure and a threat by other West African nations of a military intervention.
He has lodged a challenge to the election result with Gambia's Supreme Court and last week filed a fresh injunction to prevent the chief justice from swearing Barrow into office.
Last week, the Supreme Court said Jammeh's challenge to the election result could not be heard for several months as it did not have a full bench, and the extra judges needed to hear the case were not available.
The Gambia relies on foreign judges, notably from Nigeria, to staff its courts due to a lack of its own trained professionals.
Leaders of neighbouring countries and the Economic Community of West African States, or ECOWAS, have repeatedly called on the long-serving rule to leave office peacefully, so far to no avail.
"Military and diplomatic sources in Abuja say they are not overthrowing Jammeh," Al Jazeera's Ahmed Idris, reporting from the Nigerian capital, said, "but are enforcing the mandate of ECOWAS and the African Union, as well as ensuring that the choice of the Gambian people is realised at the end of Jammeh's term.
"There's been a lot of diplomatic and military activity and preparations ahead of the deadline given to Jammeh to leave office."
The announcement of the state of emergency came hours after Gambia's ministers for finance, foreign affairs, trade and the environment resigned from Jammeh's government.
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