The Israeli police ban on entry to the Maale Adumim settlement is to last until Thursday and affects some 500 Palestinian labourers, a spokesman for the settlement said.
Palestinians had initially been banned after the attack on Friday but the measure has now been extended.
The decision came as Israeli authorities announced that overnight they had arrested the Palestinian accused of committing the knife and hatchet attack at a shopping mall in the settlement.
The suspect was identified as Saadi Ali Abu Hamad, 21, from the nearby town of al-Azariya.
Israeli police said someone linked to his family told authorities he was ready to turn himself in, which led to his arrest.
Maale Adumim, east of Jerusalem, has a population of about 36,000 and is one of the largest Israeli settlements in the West Bank.
A wave of violence in Israel and the Palestinian territories since October has killed 177 Palestinians as well as 28 Israelis, an American, a Sudanese and an Eritrean, according to an AFP toll.
Most of the Palestinians who died in the violence were killed by Israeli forces while carrying out knife, gun and car-ramming attacks, according to Israeli authorities.
Others were shot dead by Israeli forces during clashes and demonstrations.
Many analysts say Palestinian frustration with Israeli occupation and settlement building in the West Bank, the complete lack of progress in peace efforts and their own fractured leadership have fed the unrest.
Israel blames incitement by Palestinian leaders and media as a main cause of the violence.
Many of the attackers have been young Palestinians, including teenagers, who appear to have been acting on their own.
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