Palestinians are furious their political HQ has been taken
The country's Security Minister, Uzi Landau, said soldiers occupying it would stay for good, and that Israel was doing no more than asserting its sovereignty.
A senior Palestinian, Hanan Ashrawi, said the move showed that Israel was trying to impose control over Jerusalem by force.
The head of the Arab League, Amr Moussa, described current events as "politically disastrous".
In an attempt to stop violence from escalating out of control, a US envoy is meeting both sides on Sunday.
Renewed diplomatic efforts came as the Islamic militant group, Hamas - which said it had carried out the bombing - announced that Palestinian security forces had arrested four of its members.
They include the man Israel says sent the suicide bomber on his deadly mission to the Jerusalem pizza restaurant where the attack took place.
One of Israel's key demands has been that the Palestinian leadership detain militants that Israel blames for attacks on its citizens.
Meanwhile, Israeli soldiers have closed down a Palestinian telecoms centre in Abu Dis near Jerusalem.
And in Gaza a Palestinian security court has sentenced a 24-year-old man to death for collaborating with Israel.
Protests
Despite international pressure, Israel remains defiant.
"Orient House will not open again - ever," Prime Minister Ariel Sharon said in an interview with the Yediot Ahronot newsaper published on Sunday.
He said he had ordered the occupation to strike at what he called the Palestinians' soft underbelly.
His is a stronger line than that taken by Foreign Minster Shimon Peres, who says talks with Palestinian leader Yasser Arafat are the only way to stop the cycle of violence.
Letter
Mr Arafat has sent a letter of protest to world leaders, urging them to intervene.
He and other senior Palestinians have warned that the occupation of the building can only dramatically worsen the conflict.
The US State Department agreed. It said Israel's move was "a serious political escalation".
Palestinians are planning a big demonstration later in the week to try to regain control of the building.
Already, Israeli police and army checkpoints have been put up to protect Orthodox Jewish neighbourhoods on the way to Orient House.
Fears are now growing that the intifada is coming to Jerusalem, whose 300,000 Palestinians have mainly steered clear of violence which has raged since last September.