"Israel, which shows no respect for the Aqsa mosque and Dome of the Rock, will see itself suffer the most damage," Erdogan said, referring to Muslim sacred sites in the elevated compound holy to both Muslims and Jews in Jerusalem's walled Old City.
Israel installed metal detectors at entrances to the compound after two police officers on guard there were fatally shot on July 14. The security move touched off the bloodiest clashes between Israelis and Palestinians for years.
The strife, including the deaths of three Israelis and four Palestinians in violence on Friday and Saturday, have raised international alarm and prompted the U.N. Security Council to convene a meeting to seek ways of calming the situation.
Israel decided early on Tuesday to remove metal detectors and replace them with "smart", less obtrusive surveillance means, an Israeli cabinet statement said.
Palestinians rejected the new measures, calling for a return to the status quo before July 14.
"I have heard of Israel 's decision to remove the metal detectors, and I hope the rest will follow," Erdogan told parliamentarians from his AK Party. "...We expect Israel to take steps for the peace of the region."
Al-Aqsa, one of Islam's holiest sites and a nationalist symbol for Palestinians seeking their own state, is built on a compound revered by Jews as the vestige of their two ancient temples. The site lies in East Jerusalem, which was captured by Israel in a 1967 war and annexed to form part of its "eternal, indivisible" capital - a move not recognized internationally.
The tensions in Jerusalem have kindled protests in Turkey. Turkish media said some protesters kicked the doors and threw stones at a synagogue in Istanbul. Erdogan called for calm and said attacking places of worship was "a big mistake".
"We have no issues with the houses of worship of Christians or Jews. We have taken the necessary measures against the attacks planned on synagogues and temples in our country," he told the parliamentarians.
Erdogan said he spoke to Israeli President Reuven Rivlin and told him that Muslims going to al-Aqsa mosque could not be treated as terrorists. "We can also not accept Jews going to synagogues and temples being treated as terrorists," he said.