The Old City is home to Al-Aqsa Mosque which is the third holiest site in Islam.
The Palestine Red Crescent Society said in a statement that at least 105 Palestinians were injured, including 22 people who were hospitalized, Press TV wrote.
The violence flared outside one of the entrances to the walled Old City, after police had barred access to some areas where Palestinians usually gather in large numbers during the Muslim fasting month of Ramadan.
Tensions were fueled by the arrival of members of the Israeli extreme right group Lehava at the end of a march during which they harassed Palestinians and chanted "Death to Arabs", according to AFP.
Israeli forces purportedly attempted to block the extremist settlers from reaching Palestinians, but they eventually used stun grenades, tear gas and water cannons against the Palestinian activists.
Israeli police said 20 officers were injured, three of whom were taken to hospital.
"It was like a war zone; it was dangerous," a Palestinian who was near the clashes outside the Old City told AFP. "That's why I left the place."
The Palestinian presidency meanwhile condemned "the growing incitement by extremist far-right Israeli settler groups advocating for the killing of Arabs, which in recent days manifested in a wave of attacks against Palestinian civilians in the Old City."
A statement late Thursday on the official Palestinian news agency WAFA urged the international community to protect Palestinians from the "settler" attacks, which it alleged were encouraged by the Israeli regime.