Israeli police entered the compound housing al-Aqsa Mosque in Jerusalem on Sunday after Palestinians threw stones at visitors at the most sensitive holy place in the city.
The confrontation added to tension running high after Israel's announcement of a plan to include religious sites in the West Bank in a Jewish heritage plan.
Witnesses said the violence began after Palestinians threw rocks at visitors touring the site. Palestinian officials said word had spread that religious Jews planned to enter the compound, which is also home to the Dome of the Rock.
Judaism's Western Wall, a Jewish prayer site revered as the remains of a perimeter wall of the second biblical Temple, sits just below the compound.
Israeli police arrested seven Palestinians and four policemen were injured by rocks, spokesman Micky Rosenfeld said. Palestinian medical sources said three Palestinians had been taken to hospital with injuries caused by rubber bullets.
Others were being treated for tear gas inhalation.
Chief Palestinian negotiator Saeb Erekat accused Israel of exacerbating tensions on purpose to undermine US efforts to broker a resumption of peace talks.
"The message is very, very clear: they are trying to sabotage all efforts to revive peace," he told Reuters.
Israel and the United States have called on Palestinian president Mahmoud Abbas to begin talks immediately. Abbas says there must be a total halt to Israeli settlement expansion first.
The Palestinians aim to establish a state with East Jerusalem, including the walled Old City, as its capital. Israel considers all of Jerusalem its eternal and indivisible capital, a claim not recognised internationally.
