Israel has dismissed the arrest of 110 suspected Islamic militants by Yasser Arafat's security forces as a charade.
The arrests are aimed at preventing Israeli retaliation for weekend suicide bombings and shooting attacks that killed 26 people.
Several Cabinet ministers have demanded that Israel expel Arafat, and reporters accompanying Prime Minister Ariel Sharon said he is weighing up the proposal.
Mr Sharon has returned from the US after a meeting with George W Bush at the White House. He headed directly to a special session of the security Cabinet convened to decide on Israel's response.
There is no indication Bush has sought to persuade the Israeli leader to hold back. Arafat "must do everything in his power to find those who murdered innocent Israelis and bring them to justice," the president said.
Israeli troops further tightened travel restrictions on Palestinians, blockading towns in the West Bank. In Israel, police were on its highest alert in case of further terror attacks, and thousands of officers patrolled malls and markets.
In Haifa, where 15 passengers and bystanders were killed in a suicide bombing on a city bus Sunday, policewomen with cocked weapons guarded at a pedestrian crossing in a residential area.
"We are at war," said a banner headline in the Yediot Ahronot daily, accompanied by two rows of photos of the victims, including 10 teenagers killed late Saturday in back-to-back suicide attacks at a pedestrian mall in Jerusalem.
In Israel, there was growing pressure on Sharon to take harsh action. Former Prime Minister Benjamin Netanyahu, a hard-liner who is expected to mount a challenge against Sharon in the next election, wrote in Maariv that unless Arafat crushes the militant groups in the next few hours, "Israel will have to destroy his regime."
Netanyahu's call was backed by leading ministers from Sharon's Likud Party.