Groups representing different areas of the country marched down Jaffa Street during Sunday's Jerusalem Day parade not far from where a wall once divided the city.
One parade float took on a current political theme. Dozens of marchers from Jewish settlements in Gaza walked behind a sign denouncing Israel's plan to pull out of the coastal territory in the summer.
"The city of Jerusalem is not just the capital of the state of Israel, it is the heart of the Jewish people," Tourism Minister Avraham Hirschson said.
Jerusalem police chief Ilan Franco said he would not let hardline Jews nor Palestinian activists disrupt the festivities in Israel's capital. Spokesman Shmuel Ben-Ruby said 3500 officers had been deployed.
In an effort to prevent clashes on the holiday, Israel's Supreme Court banned a right-wing Jewish group from visiting a disputed Jerusalem holy site known to Jews as the Temple Mount and to Muslims as Haram al-Sharif.
Israel annexed Arab eastern Jerusalem shortly after the 1967 Arab-Israeli war.
The UN subsequently issued Security Council Resolution 242, stressing "the inadmissibility of the acquisition of territory by war", and calling for the "withdrawal of Israeli armed forces from territories occupied in the recent conflict".
According to the UN, the conflict displaced hundreds of thousands of Palestinians from east Jerusalem.
Today's Palestinian leadership demands a complete Israeli pullout from the West Bank, Gaza and east Jerusalem, where they want to establish a capital.