The three-day exhibition closed a day early
The exhibition, at An-Najah University in the West Bank town of Nablus, was organised to mark the first anniversary of the Palestinian intifada.
A security official confirmed that Mr Arafat ordered the early closure of the show which featured a recreation of last month's attack on a Jerusalem pizzeria.
"The president was gravely disturbed and offended by the images in the exhibit," the official said.
The room-sized installation had broken tables splattered with fake blood and body parts.
A university branch of the militant Palestinian group Hamas built the exhibit, which recreates the scene of last month's attack on Sbarro Pizza house in Jerusalem.
A suicide bomber - Ezzaldin Almasri - blew himself and 15 other people up during a busy lunchtime at the restaurant.
The installation included a portrait of the bomber holding a koran and a rifle.
Underneath, in a reference to the military wing of Hamas - Ezzedine al-Qassam Brigades - the artist had written: "Qassami Pizza is more delicious."
Outside the exhibition, which opened on Sunday, a mural also depicted the Sbarro bombing.
A spokesman for Mr Arafat said the leader had instructed the authorities concerned "to investigate the matter and reprimand those responsible".
The Simon Wiesenthal Center, a Holocaust memorial institution, had asked the US Government to protest to Arafat about the exhibition.
The director of the centre, Rabbi Marvin Hier, said the university, which is under Arafat's control "pays homage to suicide bombers".
But some of those who visited the exhibition supported the display.
'Hit back'
"We don't like blood, but this a way to retaliate against the massacres committed by Israel, " said Alas Hmeidan, head of Islamist students at the university.
We want to show them we can hit back."
But during a speech in Washington on Monday, former Prime Minister Benjamin Netanyahu showed pictures of the restaurant exhibit.
He said that Mr Arafat is not stopping terror attacks against Israel.