The bomber was said to have been disguised as a religious Jew
Israel is sealing its borders with the West Bank and Gaza Strip, in response to two suicide attacks which left nine people dead, including two bombers.
Palestinians will be barred from entering or leaving Israel, the army announced.
Prime Minister Ariel Sharon - who has delayed his scheduled departure for talks in Washington - has blamed the latest attacks on Palestinian leader Yasser Arafat.
Sunday's bombings - one of them on a Jerusalem bus - came just hours after Mr Sharon met his Palestinian counterpart Mahmoud Abbas in the highest level contact between the two sides for more than two years.
Israeli ministers and security officials held emergency meetings to discuss the response to the attacks on Sunday.
The cabinet decided that any foreign diplomats who meet the Palestinian leader would not be allowed to meet any Israeli officials.
But Mr Sharon is said to have opposed a proposal from some of his ministers to expel Mr Arafat, according to Israeli media reports.
The BBC's David Chazan in Jerusalem says the closure of the Palestinian territories is a tough measure from Israel aimed at trying to prevent more bombings.
Early on Sunday, a man disguised as an orthodox Jew blew himself up on a bus, killing seven passengers and wounding another 20.
A second suicide bomber blew himself up as emergency crews arrived at the scene of the blast in the north of the city - but did not cause any more casualties.
Witnesses said a huge blast ripped the Jerusalem bus apart shortly before 0600 (0300 GMT) at a busy junction known as French Hill.
Police said a suicide bomber had boarded the vehicle and detonated explosives strapped to his body.
The French Hill junction has been targeted by bombers before.
It is a busy intersection where many people board buses, including Jewish settlers moving in and out of the West Bank.
On Saturday, another suicide attack overshadowed the talks between Mr Sharon and the Palestinian prime minister who is commonly known as Abu Mazen.
Two Israelis - a husband and his pregnant wife - were killed by a suicide bomber in the West Bank town of Hebron shortly before the meeting began.
ROADMAP MAIN POINTS
Phase 1 (to May 2003): End of terrorism, normalisation of Palestinian life and Palestinian political reform; Israeli withdrawal and end of settlement activity; Palestinian elections
Phase 2: (June-Dec 2003) Creation of an independent Palestinian state; international conference and international monitoring of compliance with roadmap
Phase 3 (2004-2005): Second international conference; permanent status agreement and end of conflict; agreement on final borders, Jerusalem, refugees and settlements; Arab states to agree to peace deals with Israel
Also in the West Bank on Saturday night, two gunmen were shot dead by Israeli forces when they infiltrated the Jewish settlement of Shaarei Tikva injuring two residents.
Earlier in Gaza, Israeli soldiers shot and killed an armed Palestinian and wounded nine others during clashes in Beit Hanoun.
Israel is demanding an end to attacks before it will move ahead with the implementation of the so-called roadmap for peace which envisages a Palestinian state.
At the talks with Abu Mazen, Mr Sharon urged the Palestinian Authority to tackle armed groups, particularly in Gaza.
But Abu Mazen insisted he could only take security steps once Israel decided to accept the roadmap.
Correspondents say the fact that there has been no immediate breakthrough is no surprise considering the gulf still separating the two sides.
Mr Sharon is expected to seek a number of modifications to the roadmap when he meets Mr Bush.
However, it is not clear when that meeting will take place after Mr Sharon delayed his departure for Washington.