The government of Ariel Sharon, Israeli prime minister, has so far held off from a military response to the bombing, which killed 20 people and wounded dozens more.
Statements by officials, however, indicated that the government of Mahmoud Abbas, Palestinian prime minister, was facing a last chance to suppress organisations such as Hamas and Islamic Jihad, which both claimed responsibility for the attack.
The government also suspended all contacts with the PA, froze plans to transfer four cities in the West Bank to Palestinian control, and reimposed a total closure on the West Bank and Gaza, preventing Palestinians from travelling to Israel.
Mr Abbas suspended contacts with Hamas and Islamic Jihad, whose representatives he had been meeting on Tuesday night when a suicide bomber blew himself up aboard the bus in a Jewish ultra-Orthodox neighbourhood of central Jerusalem.
He summoned a cabinet meeting last night to discuss the crisis after earlier ordering Palestinian security forces to arrest those behind the bombing.
"There are clear instructions to security forces to follow these people, find them, put them under arrest," said Nabil Amr, Palestinian information minister. "We have to use our authority to contain this tough situation and to stop the negative developments."
Mr Sharon told President George W. Bush in a telephone call: "As long as the Palestinians do not act seriously and consistently to eradicate terrorism, there can be no progress on the diplomatic tracks."
Gideon Meir, senior foreign ministry official, summed up the Israeli position even more bluntly: "This is a critical juncture for the peace process. If the PA does not do now what it is expected to do, it's the end of the peace process."
Ehud Olmert, deputy prime minister, told Israel Radio: "There is no option but to immediately use an iron fist."
Israeli officials have previously warned that the government will refuse to move to phase two of the three-phase diplomatic "road map" - envisaging the establishment of a Palestinian state - unless the PA first acts to eradicate the militants.
In an attempt to avoid conflict between the PA and the militants, Mr Abbas persuaded Hamas and Islamic Jihad to sign up to a three-month ceasefire on June 29. He hoped to resist pressure to use military means to disarm the militants and dismantle their infrastructure, as required by the US-backed road map.
Mohamed Dahlan, the Palestinian minister of state for security, said he had put his forces on standby to take whatever action against the militants the cabinet decided. The PA controls the West Bank city of Bethlehem and much of the Gaza Strip.
In Hebron, which is under Israeli control, soldiers yesterday arrested 17 in a raid on the home town of the bus bomber, Raed Misk.
Although Palestinian officials characterised previous breaches of the ceasefire as reactions to continued Israeli raids against militant targets, there was a marked change of tone after Tuesday night's bombing, in which a number of children were among the dead and wounded. Yasser Abed Rabbo, Palestinian cabinet minister, accused the militants of abandoning the national consensus and providing a pretext for the Sharon government to evade its commitments under the road map.
"Any justification of the operation is unacceptable," he said.