Israel has cut off contacts with Palestinian officials following a suicide bus blast in the heart of Jerusalem which killed 20 Israelis and injured up to 100.
Israeli soldiers are sealing off roads linking to the West Bank
Israeli Foreign Ministry official, Yonatan Peled, announced the suspension of talks on the handover of West Bank towns to
Palestinian control after Tuesday's bombing.
The ministry said Israel would also re-impose a total military closure on West Bank towns - allowing no-one in or out.
According to Israeli radio reports, police have arrested 17 Palestinians, suspected of being Hamas activists, including several of the bomber's relatives.
Palestinian security forces have also been ordered to arrest others linked to the bombing, Palestinian Minister of Information, Nabil Amr said.
Both Israeli Prime Minister Ariel Sharon and Palestinian Prime Minister Mahmoud Abbas, also known as Abu Mazen, have called urgent meetings to discuss what action to take next.
A spokesman for Mr Abbas strongly condemned the attack and said contact with Islamic militants had been cut and security measures would be taken against them.
"It was decided after meetings that the Palestinian Authority would stop all forms of dialogue with Hamas and Islamic Jihad," a senior Palestinian security official told the Reuters news agency.
"It holds them responsible for harming the higher national interest of the Palestinian people."
Meanwhile, the Pope condemned what he described as a "woeful spiral of hatred and violence" following Tuesday's bombings in Baghdad and Jerusalem.
A Vatican spokesman told BBC News Online Mr Abbas had postponed a visit to meet the Pope, scheduled for next week.
"There is no indication when it will be re-scheduled," the spokesman said.
Mr Abbas had been expected in Rome on Monday for a meeting with the Italian President, Silvio Berlusconi, who is president of the European Union.
He was also scheduled to travel on to Oslo for the 10th anniversary celebrations of the Oslo
Both Hamas and Islamic Jihad have said they carried out the bombing.
But a senior Hamas official reportedly said the bombing did not mean the end of a temporary ceasefire by the militants.
"I can't say the ceasefire is finished. We are still committed to a ceasefire as Palestinian organisations, national and Islamic, but all Palestinian organisations said clearly we will react for each aggression from the side of Israelis," Reuters quoted the official as saying.
Hamas distributed fliers in Hebron after the attack, saying the Jerusalem bombing was carried out by Raed Abdel-Hamed Mesk, 29, a mosque preacher from Hebron, the Associated Press reported.
The blast took place on Tuesday at about 2100 (1800GMT) in an ultra-Orthodox area - Shmuel Hanavi - near the old dividing line between east and west Jerusalem.
First Islamic Jihad said it was behind the attack. It had vowed revenge last week after Israeli troops killed one of its leaders in the West Bank town of Hebron.
But later, a videotape released in Hebron showed a man who identified himself as a member of Hamas, and announced he would carry out the suicide bombing.
Abu Mazen - denounced the bombing as "a horrible act which does not serve the interest of the Palestinian people at all".
He was meeting Islamic Jihad leaders in the Gaza Strip at the time of the explosion, in a new effort to persuade them to halt attacks.