William Booth, the US paper's Jerusalem bureau chief, was detained along with his colleague Sufian Taha, its West Bank correspondent.
The incident at the Damascus Gate entrance to the Old City of Jerusalem came after a member of the public accused them of inciting Palestinians against Israeli forces, police spokeswoman Luba Samri said.
The Association of Civil Rights in Israel confirmed one of their employees was questioned at the same time, though she was not with the two journalists.
"A passer-by complained that he saw a number of people intending to stage a provocation and disruption of order of young Arabs aimed at police officers in the area, allegedly for propaganda purposes," Samri said.
"In light of the complaint, officers detained a number of suspects to clarify the facts in a discreet and sensitive manner at a nearby police facility," she said, stressing Booth was released shortly after.
The country's Foreign Press Association condemned the detention "in the strongest possible terms", and said the two journalists were held by police for about 40 minutes.
The government's press office issued a statement later saying it "regrets today's incident at Damascus Gate in which a correspondent for the Washington Post was unnecessarily detained by the Border Police".
It said the incident was "probably the result of an unfortunate misunderstanding".
"Israel is doing its utmost to enable the foreign press to work freely, without any pressure," it said. "We call upon the security forces and journalists to act with restraint and to avoid confrontations during these tense times."
A foreign ministry spokesman confirmed that police would be asked for clarifications on the incident.
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