The move was announced after an urgent meeting of Ukraine's National Security and Defence Council in Kiev.
It follows weeks of unofficial action by war veterans and activists, who have been blocking roads and rail lines.
The blockade is hugely damaging to industry in the rebel-held east - but also to the wider Ukrainian economy.
On Wednesday, the council said it decided to act because of a "sharp escalation of Russia's aggression against Ukraine and the seizure of Ukrainian businesses" by the rebels in the Donetsk and Luhansk regions.
It said the decision would remain in force until the separatists handed back control of the businesses and also complied with the 2015 peace agreements signed in Minsk.
War veterans, activists and some lawmakers had for weeks demanded that all transport links with the rebels be cut, describing any business activity with the east as "trade in blood".
The veterans had also repeatedly clashed with police sent to dismantle makeshift blockade points.
The unofficial blockade has cut off vital links between industrial plants on either side of the conflict's frontline.
As a result, operations at several steel and coal plants on the separatist side have been suspended.
The blockade also puts at risk Ukraine's energy supply.
Ukraine is dependent on anthracite from the rebel-held areas, while Donetsk and Luhansk need coke produced in Ukraine's government-controlled regions.
Earlier this week, rebel leaders announced that they started shipping coal to Russia.
More than 10,000 people have died since the Russian-backed rebels seized parts of the Donetsk and the Luhansk region in April 2014, triggering clashes with Ukrainian forces.
In March 2014, Russia annexed Ukraine's southern Crimea peninsula.

Yr Egin, being built in Carmarthen by University of Wales Trinity St David, will be ready in late spring 2018.
University chiefs told the Welsh Affairs committee they hoped the site would ultimately be oversubscribed.
Vice-chancellor Medwin Hughes said he hoped Yr Egin would reach 60% capacity within the next two months but conceded it would need more companies on board.
"The £3m of upfront rent from S4C helps with cash flow for two to three years but we could need more than 60% capacity to break even," he told the committee on Monday.
As part of its contract with the University, S4C will also be paying £60,000 in annual service charges.
Brecon and Radnorshire Conservative MP Chris Davies told the committee there had been an "untidy smell around" the project and "a fog" surrounding the relationship between the university and the Welsh-language broadcaster.
Mr Hughes denied it, saying: "There has been a clear and consistent message between S4C and the University.
"As with any large agreement there are confidentiality agreements.  In the main, the engagement between S4C and the University has been presented in an appropriate manner."
MPs had summoned university leaders amid concern over a gap in funding gap for the project.
Earlier in March the Welsh Government committed £3m with after the University realised that the amount of European funding available to them would not be enough.
In February, First Minister Carwyn Jones told AMs that S4C promised that the move from Cardiff would be at no cost to the taxpayer.
Ukraine has halted the movement of all goods in and out of areas seized by pro-Russian separatists in the east of the country.
[NEXT_CONCEPT]
The building which will be S4C's new headquarters has no other tenants signed up yet, MPs have been told.