"Tens of Israelis entered a restricted building adjacent to the Cave of the Patriarchs in Hebron and security forces are currently on the spot," an Israeli military spokeswoman said.
Known to Muslims as the Ibrahimi Mosque, the nearby shrine, believed to be the burial site of biblical figures including Abraham, is frequently the focal point of tensions.
Palestinian residents said settlers had raised an Israeli flag on the roof of the building they had occupied, known to Israelis as the Machpela house.
Israeli settlers were evicted from the same building after occupying it in 2012, as they had not obtained the necessary permits to purchase it.
There is constant friction between Hebron's 2,00,000 Palestinian residents and several hundred Israeli settlers who live in the heart of the city under heavy military guard.
Anti-settlement Israeli NGO Peace Now called on authorities to evacuate the settlers, saying 15 families had entered the building.
"After their claims of ownership had been denied, the settlers have decided to take the law into their own hands and establish an illegal settlement that might ignite the region," Peace Now said in a statement.
Israel removed controversial metal detectors at the Haram al-Sharif compound, known to Jews as the Temple Mount, today, but Palestinians were continuing to boycott the site.
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