"No to the eviction of the Sub Laban family," read banners carried by demonstrators, referring to the eight occupants of the house near the flashpoint Al-Aqsa mosque compound, a site holy to both Muslims and Jews.
Rafat Sub Laban, who lives there with his parents, his sister and his brother's wife and children, said the family have rented their home since 1953 when the Old City was ruled by Jordan.
Israeli authorities issued an eviction order in September which is currently under appeal, but settlers backed by police tried to gain possession last week, he said.
"Twenty police officers with settlers wanted to evict us," he said in a statement.
Signup to our newsletter and follow us on Facebook and Twitter!
Israel seized Arab east Jerusalem in the 1967 Six-Day War and later annexed it in a move never recognised by the international community.
It claims both halves of the city as its "united, undivided capital", while the Palestinians want the eastern sector for the capital of a state of their own.
Israeli moves to expand settlement activity in east Jerusalem, both through new construction and by acquisition of existing Palestinian homes, have stirred widespread international condemnation.
Jewish groups have bought property there through shadowy frontmen and straw companies.
Selling land to Israeli settlers is viewed as treason by the Palestinians and carries a penalty of life imprisonment. Some alleged perpetrators have been killed.