Known as Jerusalem Day, the anniversary marks the seizure in the 1967 Six-Day War and later annexation of mainly Arab east Jerusalem in a move never recognised by the international community.
Police said two officers were wounded by Palestinian stone-throwers and at least four Palestinians were arrested near the walled Old City's Damascus Gate.
The demonstrators were dispersed by baton-wielding police, some on horseback.
A police statement said that in one incident "several dozen Muslims scuffled with a group of Jews".
Onlookers said at least two Palestinians were wounded in various clashes, and video footage showed a man being taken away on a stretcher by Red Crescent ambulance staff.
A Palestinian cameraman working for France's TF1 television was beaten with flagpoles by the Jewish marchers, producer Michael Illouz told AFP.
He said that Jamil Kadamani was hit on the head, back and hands and taken to hospital for examination.
Witnesses also saw journalists shoved by police.
Police would not say how many jubilant Zionists descended on the Old City's Muslim Quarter on their way to pray at the Western Wall Jewish holy site, only that "large crowds" were expected.
"They are coming here with the support of an extremist government that paid for their buses," a Palestinian woman, Muna Barbar, told AFP outside Damascus Gate.
The Palestinians want the eastern sector of the city as the capital of their promised state, and vigorously oppose any attempt to extend Israeli control.
But Israeli leaders have repeatedly vowed that the city will never again be split, calling it their "eternal, indivisible" capital.
"Jerusalem has always been the capital of the Jewish people alone and not of any other people," Prime Minister Benjamin Netanyahu said at an official Jerusalem Day ceremony.
"A divided Jerusalem is a past memory: the future belongs to a complete Jerusalem which will not be divided again."
- 'Zero tolerance' -
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Jerusalem Day is marked by a series of state ceremonies and an annual march through western Jerusalem and into the east side, which is predominantly attended by nationalist hardliners.
Every year, police deploy in strength to secure the march, which frequently provokes clashes.
This year, two non-governmental organisations appealed to the Israeli High Court to change the route so the march would not pass through the Muslim Quarter.
But last week, the court rejected the appeal, noting it did so "with a heavy heart".
In their ruling, the justices stressed there should be "zero tolerance" of anyone involved in violence, and that police should arrest anyone chanting "death to Arabs".
Spokesman Micky Rosenfeld said "thousands of police" were in and around the Old City.
Spokeswoman Luba Samri said both uniformed and undercover officers were on the streets.
"The police will show zero tolerance to any display of physical or verbal violence, will act with every means at its disposal against anyone disturbing the peace or rioting, who will be prosecuted to the full extent of the law," she said.
- 'March of hate' -
Leftist groups, including members of the Meretz party's youth wing, held a counter-demonstration outside city hall to protest against what it called the "march of hate".
An AFP journalist said about 100 people took part amid a large police presence and there was no trouble.
One participating group, the anti-racism movement Tag Meir, said the annual march had become "a focus for extremist groups" and was routinely accompanied by "racist slurs and insults, destruction of property and physical violence against the Palestinian residents of Jerusalem".
"This year we say a loud and clear 'No to the violence, the hatred and the incitement' which threaten the delicate fabric of daily life in Jerusalem," it said.
The group said its supporters would walk through the Muslim Quarter giving flowers to residents as a gesture of peace and coexistence.
Tag Meir was one of two NGOs which unsuccessfully petitioned the Supreme Court to change the route of the march.
Later Sunday, Netanyahu was to join President Reuven Rivlin for a ceremony on Ammunition Hill in east Jerusalem, a former Jordanian military post that saw some of the bloodiest fighting of the 1967 war.
Today, some 200,000 Israelis live in 15 settlement neighbourhoods in east Jerusalem alongside a Palestinian population of 310,000.