Hatem Abdel Qader, who handles Jerusalem affairs for the Palestinian Authority, was reportedly among those arrested.
Ben-Ruby said the crackdown had been ordered by Israel's internal security ministry because the celebrations violated understandings with the Palestinian Authority.
Celebrations in Nazareth, Israel's largest Arab city, were also cancelled by the police.
"This measure is yet another example of the many extreme policies that the various ministries in the Israeli government impose on us," one event organiser told Al Jazeera.
"These measures are imposed on all artists and people who care about culture. This is a form of prevention of our freedom of expression.
However, events were held in the West Bank.
Mahmoud Abbas, the Palestinian president, and Salam Fayyad, the prime minister, received officials from Morocco, Tunisia, the United Arab Emirates, Kuwait, and Jordan before attending the ceremony at an auditorium made to look like the Old City.
Israel captured East Jerusalem from Jordan during the 1967 Middle East war and annexed it as the Jewish state's "eternal and indivisible capital", a move which has not been recognised internationally.
Palestinians demand East Jerusalem as the capital of any future Palestinian state.
Jerusalem follows Damascus as the "capital of Arab culture", a title that has been handed to a different city by the Arab League every year since 1996.
Winners typically use the occasion to highlight Arab culture, sponsoring poetry, music, dance performances, lectures, school activities and sporting events.