By Rami Ayyub and Jeffrey Heller
JERUSALEM (Reuters) -Israel's new government on Monday approved a Jewish nationalist march in Jerusalem, a step that risks inflaming tensions with Palestinians hours after veteran leader Benjamin Netanyahu handed over power to Prime Minister Naftali Bennett.
In the flag-waving procession, planned for Tuesday, far-right groups will march in and around East Jerusalem's walled Old City, where tensions have remained high since 11 days of fighting between Israel and Gaza militants in May.
Palestinian factions have called for a "day of rage" against the Jerusalem march, with memories of clashes with Israeli police still fresh from last month in the contested city's Al-Aqsa Mosque compound and in a neighbourhood where Palestinians face eviction in a court dispute with Jewish settlers.
"This is a provocation of our people and an aggression against our Jerusalem and our holy sites," Palestinian Prime Minister Mohammad Shtayyeh said of the march.
After meeting with Israel's police chief and other security officials, newly sworn-in Internal Security Minister Omer Barlev approved the march and said police were well-prepared, according to a statement carried by Israeli media.
"(Great) efforts are being undertaken to preserve the delicate fabric of life and public security," Barlev was quoted as saying.
It was not clear whether participants would be allowed to enter the Old City's Muslim quarter, on a route that Israeli police had previously barred. A police spokesman did not immediately provide comment.
An original march on May 10 was re-routed at the last minute as tensions in Jerusalem led Hamas to fire rockets towards the holy city and Israel responded with air strikes on Gaza. Right-wing Israeli groups accused their government of caving into Hamas and rescheduled the march after a truce took hold.
Hamas has warned of renewed hostilities if it goes ahead, and Israeli media reported the military had made preparations for a possible escalation.
The U.S. Embassy in Jerusalem prohibited its personnel and their families from entering the Old City on Tuesday "due to calls for a Jerusalem Flag March and possible counter-demonstrations".
The march poses an immediate challenge for Bennett's government, which was approved on Sunday by a 60-59 vote in parliament.
A route change or cancellation of the procession could expose the Israeli government to accusations from Netanyahu, now in the opposition, and his right-wing allies of giving Hamas veto power over events in Jerusalem.
Suggesting that a route adjustment could be in store, Yoav Segalovitz, a deputy internal security minister, said past governments had stopped nationalists visiting Muslim sites in times of tension.
"The main thing is to consider what's the right thing to do at this time," he told Israel's Kan radio.
'DAY OF RAGE'
Formation of Bennett's alliance of right-wing, centrist, left-wing and Arab parties, with little in common other than a desire to unseat Netanyahu, capped coalition-building efforts after a March 23 election, Israel's fourth poll in two years.
Minutes after meeting Bennett, 49, on his first full day in office, Netanyahu repeated a pledge to topple his government.
"It will happen sooner than you think," Netanyahu, 71, who spent a record 12 straight years in office, said in public remarks to legislators of his right-wing Likud party.
With any discord among its members a potential threat to its stability, Israel's new government hopes to focus on domestic reforms and the economy and avoid hot-button issues such as policy towards the Palestinians.
Palestinians want East Jerusalem, which includes the Old City, to be the capital of a state they seek to establish in the occupied West Bank and Gaza.
Israel, which annexed East Jerusalem in a move that has not won international recognition after capturing the area in a 1967 war, regards the entire city as its capital.
BUDGET IN FOCUS
A key test for the new government and its stability will be how quickly it moves to pass a budget, said Yohanan Plesner, president of the Israel Democracy Institute.
"If within 3-4 months this government will pass the 2021-22 budget then we can expect this government to serve for at least two or three years. Otherwise, the instability will continue," he said.
Palestinians held out scant hope of a breakthrough in a peace process leading to a state of their own. Talks with Israel collapsed in 2014.
"We don't see the new government as less bad than the previous ones," Shtayyeh told the Palestinian cabinet.
Under the coalition deal, Bennett, an Orthodox Jew and tech multi-millionaire who advocates annexing parts of the West Bank, will be replaced as prime minister in 2023 by centrist Yair Lapid, 57, a former television host.
Lapid, widely regarded as the architect of the coalition that brought down Netanyahu, is now foreign minister.
(Additional reporting by Maayan Lubell, Ali Sawafta in Ramallah and Nidal al-Mughrabi in Gaza, Editing by Timothy Heritage and Howard Goller)