At least 30,000 people participated in the Jerusalem Day parade known as the Dance of the Flags, which led to some clashes between marchers and counter-protesters.
The route went in part through eastern Jerusalem before entering the Old City of Jerusalem through the Damascus and Jaffa gates and ending at the Western Wall, where participants sang and danced.
Hundreds of police and security personnel were deployed throughout the city for Sunday's Jerusalem Day festivities.
Some of the marchers chanted anti-Muslim epithets. Police arrested at least 10 Jewish marchers for racist chants and five Palestinians for throwing things at the marchers.
At the state ceremony marking Jerusalem Day, Prime Minister Benjamin Netanyahu pledged never to divide Jerusalem.
"Israel without Jerusalem is like a body with a weak heart. Never again will our heart be divided," he said. "A nation willing to sacrifice its heart would convince its enemies it has no desire to fight for anything. Jewish history has changed forever. The divided city has been united and will stay that way."
Meanwhile, a Palestinian man attempted to stab an Israeli soldier guarding a Jerusalem Day event.
The attack occurred Sunday morning at the Gush Etzion junction in the West Bank, where a bicycle trip was passing. The assailant was seriously injured during his capture.
Events were planned all day throughout Jerusalem to mark the 45th anniversary of the city's reunification.
Israeli lawmakers Michael Ben Ari and Uri Ariel of the right-wing National Union Party led a group of 20 on a tour of the Temple Mount Sunday morning. Ben-Ari and several other participants reportedly attempted to kneel in prayer at the site and were stopped by police. The tour's leader was arrested during a confrontation with police over the stopped prayers.
Palestinian religious leaders in Jerusalem called on followers to confront Jews celebrating Jerusalem Day in the capital and warned that the Jews would try to storm the Temple Mount and attack Muslims.
Meanwhile, Israel's Cabinet on Sunday approved a series of plans to strengthen the city of Jerusalem and advance its economic, tourist and social development. The Cabinet was holding its regular weekly on Ammunition Hill, a former military post in eastern Jerusalem and the site of one of the 1967 Six-Day War's fiercest battles.
The Cabinet decided to build residential developments in the city for those serving in the Israel Defense Forces and Israel Police, which will both speed residential construction and attract a strong population to the city, according to the Prime Minister's Office.
It also approved an allocation of nearly $1 million to develop public and tourist spaces in Jerusalem over the next six years.
"The decisions that we are making today will continue this government's considerable investments in Jerusalem in recent years, the results of which we already see today," Netanyahu said at the meeting. "These investments will help give expression to Jerusalem's vast potential as a focus for global tourism, and will greatly contribute to the development and strength of Israel's capital."