According to the government-owned Middle East News Agency, the Egyptian information ministry issued a decree yesterday prohibiting the sale of the two titles.
Two German newspapers, Die Welt and the Frankfurter Allgemeine Zeitung, are also understood to have been removed from Egyptian newsstands.
The ban comes a week after about 20 Danish newspapers republished the controversial cartoon as a sign of defiance, following news that police had foiled a plot by Islamic radicals to murder the cartoonist, who is under police protection.
The image was first published in September 2005 by Danish newspaper Jyllands-Posten and prompted a widespread backlash in Muslim countries. The caricature shows the prophet Muhammad wearing a turban in the shape of a bomb, with the fuse lit.
The WSJ ban is understood to be a reaction to a comment piece published in last Friday's paper, in which Jyllands-Posten culture editor Flemming Rose defended his decision to commission and publish the controversial image.
The piece was accompanied by a photograph showing a montage of the Danish newspapers that reprinted the cartoon.
In a statement issued by the Middle East News Agency, Anas al-Fiqi, information minister, said: "Any newspaper or magazine which publishes anything offensive to the prophet and reprints the offensive caricatures of the prophet or anything offensive to the three heavenly religions will be banned."
A spokesman for WSJ's parent company Dow Jones said it had not received any notification from the Egyptian government about the ban.
It is not yet clear which Observer piece prompted the government ban. An Observer spokeswoman had not responded by the time of publication.