Hundreds of Israeli nationalists are taking part in a flag march through occupied East Jerusalem which Palestinians see as a provocation.
The new Israeli government approved changes to the route of the delayed annual event, which marks Israel's capture of East Jerusalem in 1967.
Palestinian protesters clashed with Israeli police nearby before it began.
The Palestinian prime minister warned of "dangerous repercussions", only weeks after the conflict in Gaza ended.
At least 256 people were killed in Gaza and 13 people were killed in Israel during 11 days of fierce fighting between Israel and Palestinian militants.