Administrator Majed Mani of the Hakawati Theater complained that officials from Israel's Ministry of Public Security ordered the theater closed for eight days, canceling the festival, set to feature puppet shows and plays.
Israeli police spokesman Mickey Rosenfeld said Tuesday that organizers took funds from the Palestinian Authority, which has self-rule over Palestinians in the West Bank.
Israel claims Jerusalem as its capital, including the eastern section of the city seized in the 1967 Mideast war. It doesn't allow the Palestinian Authority to fund activities there.
Palestinians claim east Jerusalem as the capital of their future state.