For years the Islamic Movement has waged a campaign to "save" al-Aqsa, the main mosque on the compound in Israeli-occupied and annexed east Jerusalem.
The excavations have sparked a wave of Muslim protests.
Israeli police on Wednesday continued to limit access to the compound - the third holiest site in Islam - to Muslim men over the age of 45 with Israeli identity cards and Muslim women.
|Muslim protesters fear that Israeli excavations will damage key Islamic sites [AFP] |
Israel says the work is necessary but the timing of the excavations has generated anger and there are "accusations of extraordinary arrogance on the Israeli side" for not consulting with Muslim or Arab leaders, David Chater, Al Jazeera's correspondent in Jerusalem, said.
The excavation will continue for eight months.
Palestinian armed groups have warned continuing the work could threaten the Israeli-Palestinian ceasefire.
Chater said: "It could unite the whole of the Arab world against the Israelis and undermine the peace process."
Muslim governments have spoken out against the Israeli move.
"The reaction of the Islamic world to this insulting move should be in a way to make the Zionist regime regret it," state television quoted Iran's supreme leader Ayatollah Ali Khamenei as saying.
Abdel Ilah Khatib, the Jordanian foreign minister, called for "serious efforts" at the UN Security Council to halt the Israeli work.
Sheikh Tayssir al-Tamimi, who heads the religious courts in the Palestinian territories, called for a worldwide one-day protest to denounce the works.
A Palestinian militant group linked to the secular Fatah party threatened to attack synagogues in retaliation.