The two were questioned on Monday on suspicion they planned to fire a missile into Islam's third holiest mosque, in hopes of disrupting the planned Gaza withdrawal, according to Israeli police.
A police statement initially said the two were placed under house arrest.
However, Jerusalem police spokesman Shmuel Ben-Ruby later clarified that the suspects have since been released.
Israeli radio stations reported that the two would not be indicted because they never carried out any part of their plan and expressed regret during their interrogation.
Naftali Wirtzburger, attorney for the two, said his clients had never served in the army and had no idea how to fire a missile. He accused the security forces of entrapment.
The Dome of the Rock is part of
Jerusalem's Noble Sanctuary
"They (the security forces) sent an agent to stir them up and try to encourage them to commit a crime," he said.
Another Israeli, a 61-year-old businessman, was questioned about a plan to fly a model plane fitted with a camera over al-Aqsa Mosque to provoke Muslims, police said.
The compound is known to Muslims as the Haram al-Sharif while Jews say it is the Temple Mount.
Adnan Husaini, director of the Islamic trust which administers the mosque compound, warned that any harm to the site would shake the world.
"The only one who will bear responsibility for such an explosion is the Israeli government and the Israeli police," he said.
"The only one who will bear responsibility for such an explosion is the Israeli government and the Israeli police"
Director of the Islamic trust overseeing al-Aqsa compound
Extremist Jews opposed to Israel's planned Gaza Strip redeployment have threatened to attack or storm the mosque in the summer, in order to divert police and soldiers from Gaza, and thereby stop the pullout.
In April, police barred Jewish anti-pullout activists from rallying at the site, fearing a mass gathering would set off confrontations between Jews and Muslims.
The site has been vulnerable to attacks by Jews in the past.
In 1969, an Australian fundamentalist set fire to al-Aqsa Mosque and caused extensive damage, destroying irreplaceable Islamic artefacts, including a thousand-year-old pulpit, saying he wanted to pave the way to rebuild what he called the Temple.
In 1982, an Israeli soldier from the US opened fire on the Dome of the Rock, which is situated within the Noble Sanctuary, killing two Palestinians and wounding nine.
Two years later, Jewish extremists who had amassed large amounts of army explosives to blow up the Dome of the Rock, were caught.
Prime Minister Ariel Sharon provoked Muslims when he visited the Haram al-Sharif in late 2000 while being the opposition leader. His visit sparked off the Palestinian uprising, known as al-Aqsa Intifada.