The May 10 parade, which was meant to celebrate Israel's capture of East Jerusalem in the 1967 Mideast war, had begun when Hamas fired rockets from Gaza toward the holy city.
Smoke could be seen rising from tear gas canisters in the compound amid reports that Israeli forces fired stun grenades to disperse the crowds.
Three people have been arrested as clashes continue at Jerusalem's Al-Aqsa Mosque complex.
Netanyahu facing challenge to secure fourth term as he promises more settlements, no Palestinian state in final push
Newsweek Europe's live updates for this morning's deadly attack on Jerusalem's Bnei Torah synagogue
Israeli police on Thursday shot dead a 32-year-old Palestinian man suspected of having tried hours earlier to kill a far-right Jewish activist, leading to fierce clashes in East Jerusalem and fears of a new Palestinian uprising.
Israelis are buying up apartments in a Palestinian district of East Jerusalem, protected by armed paramilitary police
Elite intelligence troops in Israel go public to protest against routine spying on Palestinians, setting off a political storm
Tariq Khdeir of Tampa was arrested protesting the death of his cousin, Mohammed Abu Khudeir
Palestinians staged the protest after hearing a teenager had died from a head injury sustained in clashes with riot police last week