Israel and Turkey had earlier this year finally mended a years-long crisis in relations with the naming of ambassadors, but a considerable potential for tension remains.
Israeli Prime Minister Benjamin Netanyahu has backed the bill, which if agreed would apply across Israel and also to annexed east Jerusalem where more than 300,000 Palestinians live.
Turkish Deputy Prime Minister Numan Kurtulmus said that for centuries the Islamic call to prayer, church bells and Jewish prayers had mixed together in multi-faith Jerusalem.
"This is something on which there can be no compromise," Kurtulmus, who is chief government spokesman, said after a cabinet meeting. "It's absolutely unacceptable.
"It's an insult to the culture, past and history of Jerusalem. It makes no sense and is contrary to freedom of belief."
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The bill initially met opposition from ultra-Orthodox Jews -- who feared Jewish rituals could also be hit -- but could now be revived after efforts were made to meet their concerns.
The bill was drafted in response to complaints about noise from mosques, but would in theory apply to all religious institutions.
Israeli Jews living in settlements in the east of Jerusalem had protested against the volume of Islamic prayer calls.
Relations between Israel and Turkey plunged to an all time low in 2010 after an Israeli raid on a Turkish ship killed 10 Turkish activists heading to Gaza.
But the two sides are already working to bring cooperation back to former levels and are holding talks on building an ambitious pipeline project to pump Israeli gas to Turkey and Europe.
Nevertheless, considerable tensions remain with Turkish President Recep Tayyip Erdogan presenting himself as a champion of the Palestinians and regularly meeting with Hamas chief Khaled Meshaal.
Israel, the United States and the European Union all view Hamas, which governs the Gaza Strip, as a terrorist organisation.