Around 1,000 apartments, offices and shops were destroyed in the latest round of fighting in May in Gaza, an impoverished enclave of two million controlled by the Hamas Islamist group.
The Israeli Defence Force said that in response to the "arson balloons", its "fighter jets struck military compounds belonging to the Hamas terror organisation".
The airstrikes were launched today after Palestinians in Gaza released incendiary balloons that caused at least 10 fires in southern Israel.
The violence marks the first major flare-up between Israel and Palestinian militants since a ceasefire came into place in May, ending 11 days of heavy fighting that killed 260 Palestinians, according to Gaza authorities, and 13 people in Israel, the police and army there said.
Palestinians consider the annual march, meant to celebrate Israel's capture of east Jerusalem in 1967, to be a provocation.
Some chanted "Death to Arabs" before others quieted them.
He was referring to the so-called Flag March to be held in the Old City of occupied Jerusalem, which was called for by settler nationalists and approved by the new Israeli government.
Tuesday's crowd, while boisterous, appeared to be much smaller than during last month's parade.
The activists previously reached an agreement with the police that the march will start from Ha-Nevi'im street (Street of the Prophets) and then head to the Damascus Gate, where participants will dance with Israeli flags.
Mansour Abbas, whose Raam party is the first Arab faction to join an Israeli coalition, said the march was "an attempt to set the region on fire for political aims", with the intention of undermining the new government.
The so-called March of the Flags celebrates the anniversary of the city's "reunification" after Israel captured east Jerusalem from Jordan in 1967 and annexed it, a move not recognized by most of the worldwide community.
Medics said 33 Palestinians were wounded and police said two officers were injured and 17 people were arrested.
In the afternoon, Hamas-linked Palestinians launched some incendiary balloons from Gaza, setting off at least 10 blazes in southern Israel, according to Israel's national fire department.
In the run-up to the march, Israel took a number of measures to beef up security, including having 2,000 police officers secure the parade in Jerusalem, sending reinforcements to the West Bank and deploying Iron Dome missile defense batteries, including reportedly near the capital.
United Nations deputy spokesperson Farhan Haq said United Nations officials have urged all sides to avoid "provocations" in order to solidify the informal cease-fire that halted the Gaza war.