The leader of the Hamas militant group, which runs Gaza, called for a new armed uprising in a widespread show of anger, as the demonstrators torched American and Israeli flags.
In the West Bank, crowds of protesters set tires on fire and hurled stones at Israeli troops.
In Bethlehem, troops fired water cannons and tear gas to disperse a crowd, in clashes that could cloud the upcoming Christmas celebrations in the town of Jesus' birth.
Trump's dramatic break yesterday with decades of US policy on Jerusalem counters long-standing international assurances to the Palestinians that the fate of the city will be determined in negotiations.
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The Palestinians seek Israeli-annexed east Jerusalem, captured by Israel in 1967, as a future capital.
Palestinians shuttered their schools and shops on Thursday to begin three "days of rage" over Trump's decision.
Rallies were underway in other West Bank cities, and a demonstration was being held outside the Damascus Gate of Jerusalem's Old City.
Palestinian officials said dozens of protesters were lightly wounded, most from tear gas inhalation. Friday, the Muslim holy day when Palestinians gather for weekly mass prayers, could prove more violent.
In the Gaza Strip, Hamas' leader Ismail Haniyeh called on Palestinians to launch a new intifada, or uprising, against Israel on Friday.
"The American decision is an aggression on our people and a war on our sanctuaries," Haniyeh said in a speech, urging supporters "to be ready for any orders."
"We want the uprising to last and continue to let Trump and the occupation regret this decision," he said.
But the group's capabilities are more limited now. Gaza, Hamas' stronghold, is closed by an Israeli blockade, while in the West Bank, many of its members have been arrested. Nonetheless, it possesses a large arsenal of rockets in Gaza capable of striking much of Israel.