A cartoon in Friday's edition of the newspaper, Iran, depicted an ethnic Azeri as a cockroach, which led to clashes between police and thousands of people in the northwestern city of Tabriz.
As well as suspending publication of the newspaper on Tuesday, Tehran’s chief prosecutor said that the editor-in-chief, Mehrdad Qasemfar, and the cartoonist, Mana Neyestani, had been arrested and detained for investigation.
"Some charges were brought against both of them and they were transferred to Evin prison," Saeed Mortazavi told state television.
Hassan Kamran, a member of Iran's press supervisory committee, which closed the paper, told the ISNA news agency: "This ban is because it published material which provokes divisions among people. It is banned, and its case has been sent to the press court."
'Insult to Iranians'
He said the newspaper would not be published until a verdict on the case was issued by a special tribunal dealing with press offences.
Quoted by the official IRNA news agency, the interior minister, Mostafa Pour-Mohammadi, said the cartoon was "an insult to all Iranians, and we cannot tolerate that".
The culture minister, Saffar Harrandi, appeared on state television on Monday to apologise for the cartoon, but Azeri politician Eshrat Shayegh said the apology came "at least one week" too late.
"This ban is because it published material which provokes divisions among people"
Iranian press supervisory committee
The cartoon depicted a boy repeating the Persian word for cockroach in different ways while the uncomprehending bug in front of him says "What?" in Azeri.
The cartoonist’s relatives say he did not intend to insult Azeris.
Violence erupted in Tabriz with police dispersing the crowd with teargas as they attempted to storm the local governor’s office.
The hardline Kayhan newspaper blamed foreigners for inciting the unrest.
"Our fellow Azeri countrymen are too clever to be exploited by Iran's sworn enemies in their plots," it said.
The paper is not the first to run into problems this year.
A weekly paper in southern Iran was permanently shut down in April for "insulting the Islamic republic's leadership".
In March, another local weekly newspaper published in Iran's ethnic Azeri provinces was shut down on charges of ethnic bias and of acting against national security.
Ethic Azeris make up a quarter of Iran’s population and are concentrated in the north of the country.
While some Azeris hold high-ranking positions, they are often the butt of jokes from Iran’s Persian elite.