Some 200 leftists, including Arabs and Jews, protested the eviction of Palestinian families from their homes in the east Jerusalem neighborhood of Sheikh Jarrah in the early hours of Sunday morning.
Clashes broke out between the demonstrators and security forces, and 13 people were arrested.
Israeli police evicted two Palestinian families, then allowed Jewish settlers to move into their homes, drawing criticism from Palestinians, the United Nations and the State Department.
Police arrived before dawn and cordoned off part of the Arab neighborhood before forcibly removing more than 50 people, said Chris Gunness, spokesman for the UN agency in charge of Palestinian refugees.
UN staff later saw vehicles bringing Jewish settlers to move into the homes, he said.
Protesting in Sheikh Jarrah on Sunday (Photo: AP)
Israeli police cited a ruling by the country's Supreme Court that the houses belonged to Jews and that the Arab families had been living there illegally.
Gunness said the families had lived in the homes for more than 50 years.
US State Department spokeswoman Megan Mattson said in response to the eviction that such actions in east Jerusalem constitute violations of Israel's obligations under US-backed "Road Map" peace plan.
"Unilateral actions taken by either party cannot prejudge the outcome of negotiations and will not be recognized by the international community," she said in a statement.
Robert Serry, the UN Special Coordinator for the Middle East Peace Process, called the evictions "totally unacceptable."
"These actions heighten tensions and undermine international efforts to create conditions for fruitful negotiations to achieve peace," he said in a statement.
Palestinian negotiator Saeb Erekat also condemned the move.
"While Israeli authorities have promised the American administration that home demolitions, home evictions and other provocations against Palestinian Jerusalemites would be stopped, what we've seen on the ground is completely the opposite," he said in a statement.
Khawla Hanoun, 35, who lived in one of the homes, said police ordered her and 16 family members to leave the house before dawn and forced them out at gunpoint when they refused.
"Now our future is in the streets," she said. "We will remain steadfast until we return home. By any method, we must go back home."