A hail of gunfire could be heard on grainy footage posted on social media.
Police officials said officers shot two assailants dead at the site.
Israel called in a top Palestinian cleric from the al-Aqsa mosque for questioning on Friday afternoon, following a spike in violence in Jerusalem that saw Friday prayers at Islam's third holiest site cancelled for the first time in 17 years.
Israel has closed the site for further weapons sweeps.
After the attackers retreated to the mosque complex, teams of Israeli police forces entered the esplanade in pursuit and opened fire, killing three.
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Israel has also approved the construction of 71 housing units in the Arab Al-Sawahra Palestinian neighbourhood, and 29 others in Sharafat, according to Maariv. Kamil Shnaan, 22, was the son of a former Israeli parliamentarian.
It was one of the most serious attacks so close to the volatile holy site, known to Muslims as the Noble Sanctuary and to Jews as Temple Mount, in years. The Israeli government has increasingly encroached on the mosque with police, and excavations in the immediate area.
One officer was ambushed in what appears to be the Muslim Quarter of the Old City, just outside of the Al-Aqsa Mosque.
The site's importance to both faiths is part of the rising tension between Palestine and Israel.
Gradually reopening the site to worshippers and visitors "will be based on an estimate that will be made Sunday", he said. The compound was then declared closed and prayer was banned.
An argument ensued, and Hussein was detained but later released.
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The closure stopped Muslims gathering there for Friday prayers, drawing a call for resistance from Palestinian leaders.
Jordan is a custodian of the compound in Israeli-occupied east Jerusalem. It later annexed the city in 1980, claiming all of Jerusalem as the Jewish state's "eternal" capital - a move never recognized by the global community.
The site is administered by the Islamic Waqf organisation.
Since September 2015, Palestinian attackers have killed 43 Israelis, two visiting Americans and a British tourist.
He said "the Israeli project is to remove as many Palestinians as possible" and to replace them with Zionists from around the world, adding that the Tel Aviv regime resorts to violence, demolition of Palestinian homes and terrorism to achieve that goal.
The two policemen killed were Israeli Arab citizens from the country's Druze community.
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While the G20 dynamics may have been strained, world leaders have clearly moved up the learning curve on how to handle Mr. The communiqué declares the Paris Agreement "irreversible", leaving it open for the USA to reverse its decision to leave.
The violence had greatly subsided in recent months.
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