The danger of a terrorist threat was "exceptionally" high, the head of the PST security service said.
Roger Berg said the early Saturday shooting, which claimed two lives and injured at least 21 other people, was considered an Islamist-motivated terrorist attack.
Norway's terrorist alert level is now five. Previously it was three.
The gunman fired in and around the London Pub, a bar and nightclub which bills itself as Oslo's "gay headquarters since 1979." Shots were also fired at other venues nearby, in an area of the city known for its night-life.
Witnesses said they saw a man with a bag arrive at the scene, take out a gun and start shooting. Panic ensued.
Members of the public helped in the arrest of the suspect and police later thanked them for their efforts.
Of the 21 people injured, police said 10 were in serious condition. One man who died was in his 50s, the other in his 60s.
Police Inspector Tore Soldal said that the attacker was a Norwegian citizen of Iranian origin. They found a pistol and an assault rifle during a search of his flat. Both were unregistered.
The suspect's defence attorney, John Christian Elden, told Norwegian broadcaster NRK it was too early to speak about a possible motivation and that the man's mental health needs to be evaluated.
Large areas of Oslo's party mile were cordoned off on Saturday as police continued their investigations.
People had been celebrating in the city centre late into the long summer evening ahead of the planned Pride parade and bars, restaurants and other buildings were festooned with rainbow flags.
By Saturday evening rainbow flags were flying across the city, including on government buildings and embassies.
Oslo Mayor Marianne Borgen had earlier told journalists how much the city was looking forward to the event - it would have been the first time since the coronavirus pandemic erupted.
The parade, which would have been Oslo's 40th Pride march, was cancelled by organisers on the advice of police. Nevertheless, several thousand shocked and grieving people marched along the planned route in the afternoon, according to Norwegian media.
