The decision to reopen the compound, also holy to Jews who call it the Temple Mount, was taken by Prime Minister Benjamin Netanyahu who was leaving for an official visit to France.
"It has been decided to reopen the Temple Mount gradually tomorrow (Sunday) for the faithful, visitors and tourists," the premier's office said in a statement.
Three Arab Israeli assailants opened fire on Israeli police yesterday in the Old City before fleeing to the nearby Haram al-Sharif compound -- Islam's third holiest site -- where they were shot dead by police.
The White House "strongly" condemned yesterday's attack, saying "there must be zero tolerance for terrorism".
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After the attack Israeli authorities took the highly unusual decision to close the holy site for Friday prayers, angering Muslims and drawing the ire of Jordan which administers the compound.
Wael Arabiyat, Jordan's Islamic affairs minister, warned that keeping Al-Aqsa mosque closed is "dangerous" and "unprecedented", after Amman called for its immediate reopening.
Hundreds of Jordanians, responding to a Muslim Brotherhood call, demonstrated in Amman today, calling for the "liberation of Al-Aqsa".
Today, Israeli security forces locked down parts of Jerusalem's Old City, restricting access through Damascus Gate, the main entrance used by Palestinians.
Only residents with identification were allowed to pass.
"This is not security. This is punishment," said Bader Jweihan, 53, an accountant who was denied entry.
Musa Abdelmenam Qussam, 73 and with poor eyesight, was helped by a grandson as he walked with a cane and sought to enter.
But the owner of a book wholesale shop in the Old City was also turned away.
"This city is for all the world. It must be open."
Jaffa Gate, heavily used by tourists and near the Old City's Jewish Quarter, was open but with a heavy police presence.
A group of tourists from Poland said they were concerned when they heard about yesterday's shooting but wanted to continue their visit.
"It stressed me a little," said Ewa, who did not want to give her last name.
At Lions Gate near the site of the attack, police guarded the entrance and restricted access, checking IDs.
Palestinian president Mahmud Abbas and Netanyahu spoke by phone yesterday as tensions rose.
Israeli authorities also detained Jerusalem's top Muslim cleric, grand mufti Muhammad Ahmad Hussein, as crowds gathered at the gates of the Old City after the attack, his son said.
Hussein was released later yesterday after being questioned, another of his sons said.