The building work is a prelude to the construction of a new walkway
Hundreds of police poured into the disputed holy site in the Old City, firing rubber bullets and tear gas.
There are reports that a number of Palestinians protesters have barricaded themselves inside the mosque.
They have been angered by controversial renovation work on Temple Mount, known to Muslims as the Haram al-Sharif.
The building work is a prelude to the construction of anew walkway leading to the compound containing the mosque - Islam'sthird holiest site.
Palestinians say it could damage the foundations of thecompound and Muslim leaders had called for a "day of anger" on Fridayto voice their opposition to the move.
The Israeli authorities say renovations are needed tosafeguard the ancient site and have guaranteed that there will be nostructural damage to the area.
The compound is also revered by Jews as the site of their biblical temples.
Israeli police say 17 protesters and 15 police officers have been injured in the clashes.
Sheikh Mohammad Hussein, who is holed up inside themosque, spoke to the BBC by telephone saying that Israeli forces hadthrown a cordon around the area and were not allowing anyone in or out.
"We are besieged. Ambulances are not allowed to enter toevacuate the injured Palestinian people. Paramedics are offering firstaid to them," he said.
The BBC's Matthew Price in Jerusalem says that althoughat present these are relatively minor skirmishes, such is thesensitivity of this site that it has the potential to trigger muchgreater violence elsewhere.
An Israeli Police spokesman, Micky Rosenfeld, told theBBC that more than 2,500 police officers had been deployed in the OldCity to prevent the unrest from spreading:
"We are in complete control of the situation. Our policeofficers and border police are located at every area in and around EastJerusalem as well as in the Temple Mount," he said.
"The rioters who have dispersed have entered inside thedifferent areas as well as the mosque and at the moment police are notentering. We are working carefully and cautiously and waiting for themto come out and leave the area.
There have been widespread protests among Palestinians and the wider Muslim world since the excavations began on Tuesday.
The compound area has been a flashpoint for violence since Israel captured it during the 1967 Middle East war.
In 1996, Israel's opening of an exit to a tunnel nearthe site triggered riots in which 80 people died in clashes betweenPalestinian protesters and Israeli troops.
And in 2000, the Palestinian uprising began at themosque following a controversial tour of the site by Israel's thenopposition leader, Ariel Sharon.
Since 1967, the compound has remained under Muslim jurisdiction in conjunction with neighbouring Jordan.