The crowds, who were overwhelmingly young Orthodox Jewish men, were celebrating Jerusalem Day -- an Israeli holiday that marks the capture of the Old City in the 1967 Mideast war.
Palestinians see the event, which passes through the heart of the Muslim Quarter, as a provocation. Last year, the parade helped trigger an 11-day war with Gaza militants, and this year's march drew condemnations from the Palestinians and neighboring Jordan.
Israel said it deployed thousands of police and security forces for the event, and violent scuffles between Jewish and Palestinian groups erupted inside the Old City before the parade began.
As the march got underway, groups of Orthodox Jewish youths gathered outside Damascus Gate, waving flags, singing religious and nationalistic songs, and shouting ``the Jewish nation lives'' before entering the Muslim Quarter.
One large group chanted ``Death to Arabs,'' and ``Let your village burn down'' before descending into the Old City.
Police cleared Palestinians out of the area, which is normally a bustling Palestinian thoroughfare. At one point, a drone flying a Palestinian flag flew overhead before police intercepted it.
Ahead of the march, Prime Minister Naftali Bennett said that ``flying the flag of Israel in the capital of Israel is an obvious thing,'' but also urged participants to celebrate in a ``responsible and respectful manner.''
Bennett later issued a statement instructing police to show ``no tolerance'' toward the racist groups. He described them as a ``minority that came to set the area on fire'' and vowed to prosecute violent extremists, a step that few Israeli governments have taken in the past.
Foreign Minister Yair Lapid called the racist groups ``a disgrace.''
Thousands of people normally take part in the march through the Muslim Quarter, including some who shout out nationalistic or racist slogans toward the Palestinians, before making their way to the Western Wall in the Jewish Quarter on the other side of the Old City.
Last year, after weeks of Israeli-Palestinian unrest in Jerusalem, authorities changed the route of the march at the last minute to avoid the Muslim Quarter.
But it was too late by then, and Hamas militants in Gaza fired a barrage of rockets toward Jerusalem as the procession was getting underway. That set off 11 days of heavy fighting.
Sunday's march came at a time of heightened tensions. Israeli police have repeatedly confronted stone-throwing Palestinian demonstrators in the disputed compound in recent months, often firing rubber bullets and stun grenades.
Despite the recent unrest, Israeli leaders decided to allow this year's parade to take place along its traditional route through the Muslim Quarter.
Ahead the march, there were small scuffles between Israeli nationalists and Palestinians, who threw chairs and bottles and shouted ``God is great'' at the marchers.
Some marchers sprayed pepper spray at Palestinians and journalists. In one video shared on social media, a young Jewish man kicked and sprayed an older Palestinian woman in the face, sending her crumbling to the ground.
Police also fired rubber-tipped bullets and used clubs and pepper spray to disperse Palestinian protesters from the area.
The Palestinian Red Crescent rescue service said 62 people were injured, including 23 who needed hospitalization.
Israeli police said they arrested over 50 suspects suspected of disorderly conduct or assaulting police officers. It said five officers were injured.
Ahead of the march, over 2,500 Jews visited Jerusalem's most sensitive holy site inside the Old City, as Palestinians barricaded inside the Al Aqsa Mosque threw rocks and fireworks.
Al Aqsa is situated on a hilltop compound revered by Muslims and Jews. The mosque is the third-holiest site in Islam, and the Palestinians are fiercely protective over what they consider to be a potent symbol of their national aspirations.
The compound also is the holiest site for Jews, who call it the Temple Mount and revere it as the home of the biblical Temples. The competing claims to the site lie at the heart of the Israeli-Palestinian conflict and have triggered numerous rounds of violence.
Police also said one of the Jewish groups ``violated visitation rules'' and was removed. Israeli media said the group had unfurled Israeli flags in the compound.
Under longstanding arrangements known as the ``status quo,'' Jews are allowed to visit the compound but not pray. In recent years, however, the number of Jewish visitors has grown significantly, including some who have been spotted quietly praying.
Such scenes have sparked Palestinian fears that Israel is plotting to take over or divide the area. Israel denies such claims, saying it remains committed to the status quo.
Among the visitors was Itamar Ben-Gvir, leader of a small ultranationalist opposition party and a follower of the late racist rabbi, Meir Kahane, who entered with dozens of supporters under heavy police guard.
Palestinians shouted ``God is great'' as Ben-Gvir, accompanied by Israeli police, shouted ``the Jewish people live.'' Police said they locked the gates of the mosque and said they made 18 arrests.
Nabil Abu Rdeneh, spokesman for Palestinian President Mahmoud Abbas, accused Israel of ``playing with fire irresponsibily and recklessly.''
Jordan condemned Ben-Gvir's visit to the site and warned that the ``provocative and escalating march'' could make things deteriorate further. Jordan controlled east Jerusalem until Israel captured it in 1967 and it remains the custodian over Muslim holy sites.
Israel captured east Jerusalem, including the Old City, in the 1967 Mideast war. Israel has annexed east Jerusalem in a move that isn't internationally recognized and claims all of the city as its capital. The Palestinians seek east Jerusalem as the capital of a future state.
Gaza's Hamas rulers praised what they called ``the great heroism'' shown by Palestinians at Al Aqsa earlier Sunday. ``The Islamic Palestinian Arab identity of the Al Aqsa Mosque will be protected by our people and their valiant resistance with all their might,'' said Hazem Qassem, a spokesman for the group.
The group, however, may be wary of getting involved in another round of fighting. Gaza was hard hit in last year's war, and the territory is still struggling to repair the damage.
In addition, some 12,000 Gazan laborers are now permitted to work inside Israel as part of efforts to maintain calm between the enemies.
Renewed fighting could risk losing those jobs, which have given a small boost to Gaza's devastated economy.