With efforts to defuse tensions already strained, deputy foreign minister Tzipi Hotovely stoked Palestinian fears by saying it was her "dream to see the Israeli flag flying" over the holy site, which is sacred to both Muslims and Jews.
"We should raise the flag, this is Israel's capital and it is the holiest place to the Jewish people," she said in excerpts from a TV interview to be broadcast Tuesday.
Netanyahu's office reacted swiftly with a statement late Monday recalling his promise to maintain the status quo which allows Muslims to pray at the site, and Jews to visit but not pray there.
"Prime Minister Netanyahu made it clear that he expects all members of the government to act accordingly," his office said in a statement.
Palestinians accuse Israel of seeking to allow Jewish prayer at the hilltop site -- known to Jews as Temple Mount -- in Jerusalem's walled Old City.
An increase in Jewish visitors to the site, some of whom secretly pray there despite it being forbidden, and inflammatory statements by politicians, have fuelled tensions.
Clashes at the mosque compound in east Jerusalem, a Palestinian area annexed by Israel in 1967, spiralled into a wave of stabbing attacks and shootings that have left nine Israelis dead since October 1.
On Tuesday a 76-year-old Israeli man who was shot in the head and stabbed in the chest in an attack on a Jerusalem bus on October 13 succumbed to his wounds, according to the Hadassah hospital.
Anti-Israeli attacks and protests have seen 56 Palestinians and one Israeli Arab shot dead since October 1.
An Israeli Jew and an Eritrean have also been killed after being mistaken for attackers.
Hotovely, from Netanyahu's right-wing Likud party, told Knesset TV that Jews should be allowed to pray at Al-Aqsa, but later issued a statement saying: "My personal opinions are not government policy."
- 'No hope' -
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The surge in violence has prompted an intense diplomatic drive to douse tensions that many fear herald a third Palestinian intifada.
Palestinian president Mahmud Abbas met European Union foreign policy chief Federica Mogherini late Monday in Brussels in the latest effort to calm the crisis.
Abbas repeated his criticism of what he said was Israel's "non-respect" for the rules at the Al-Aqsa mosque compound.
Netanyahu, who has vowed not to change the status quo, has accused Abbas of inciting the violence by making such accusations.
"The situation in Palestine is extremely serious and grave and may even deteriorate. This is my fear," Abbas said.
"The main reason is the feeling of disappointment (among) the young generation," who feel there is "no hope," Abbas said.
Many of the youths leading the unrest were born under Israeli occupation, and see no way out, with a moribund peace process offering them little hope of achieving their dream of a Palestinian state.
A flurry of diplomatic activity last week saw meetings between US Secretary of State John Kerry with Netanyahu in Berlin, before he flew to Amman to meet Abbas and King Abdullah II.
The result was an agreement to install cameras at the Al-Aqsa compound, which Netanhayu said would serve to "refute the claim Israel is violating the status quo (and) to show where the provocations are really coming from."
However the Palestinian Liberation Organisation (PLO) rejected the idea as an effort to allow Israel to exercise more control over the site which it will use "against the Palestinians".
The plan immediately ran into trouble when a team sent by the Jordanian-run trust which administers the site to install the cameras was stopped by Israeli police.
Amman has retained custodial rights over the holy sites -- annexed along with the rest of east Jerusalem -- but Israel controls access.
Netanyahu said that arrangements to install the cameras "were supposed to be coordinated at the professional level", as highlighted by Kerry who mentioned technical teams from both sides should meet.
But the Jordanian government hit back, saying: "Israel has nothing to say about the installation of cameras".
"The Hashemite kingdom is the guardian of Jerusalem's holy sites and the occupying Israeli force shouldn't meddle in that," said Islamic Affairs Minister Hayel Abdelhafiz in comments reported in the daily al-Destour.