Netanyahu convened his top security officials immediately after landing back in Israel yesterday from delivering a speech to the UN General Assembly.
"These steps include, among others, speeded up demolition of terrorists' homes," he said in a video address in Hebrew distributed by his office.
The Old City restrictions announced Sunday by police will be in place for two days, with only Israelis, tourists, residents of the area, business owners and students allowed.
Israeli security forces were already on alert after recent clashes at the compound and surrounding Old City, as well as the murder in the West Bank of a Jewish settler couple in front of their young children on Thursday.
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Threatening to stoke the flames higher still, Israeli troops shot dead an 18-year-old Palestinian man during clashes in Tulkarem in the occupied West Bank, Palestinian police and medics said.
Netanyahu said he instructed ministers on steps "to prevent terror and deter and punish the attackers".
They would also include broader use of detention without trial for suspects, further reinforcement of security forces in Jerusalem and the occupied West Bank and restraining orders keeping unspecified "inciters" away from Al-Aqsa.
The Palestinian government denounced "Israeli escalation" after the announcement of the ban, which Israeli Public Security Minister Gilad Erdan called unprecedented.
Around 300,000 Palestinians live in Israeli-annexed east Jerusalem, where the Old City is located.
On Saturday night, a Palestinian said to be an Islamist militant killed two Israeli men and wounded a woman and a toddler in a knife and gun attack in the Old City. Police shot dead the attacker.
In a separate incident early yesterday, a 19-year-old Palestinian stabbed and wounded a 15-year-old passerby in west Jerusalem before being shot dead by police while fleeing.