The holy site in Jerusalem's Old City is known to Muslims as the Noble Sanctuary and to Jews as the Temple Mount.
Raed Salah, the leader of the Islamic Movement, has organised protests at the site and police, after arresting him, banned him from the area for more than two months.
The work, which began with an archaeological dig earlier this month, has sparked protests by Muslims throughout the Arab world.
The site - home to al-Aqsa mosque and the gold-capped Dome of the Rock - is Islam's third-holiest shrine, and the excavations have inflamed Muslim fears that Israel is planning to damage it.
Israel says the work is meant to salvage archaeological finds in advance of the construction of a new pedestrian walkway up to the hilltop compound, to replace one damaged in a 2004 snowstorm.
Israeli archaeologists insist there is no danger to the compound.