Hamas on Sunday threatened to take military action if the Jerusalem flag march goes ahead on Tuesday as planned, Israel'sChannel 12 reported on Monday.
But Palestinian prime minister Mohammad Shtayyeh condemned it as a provocation.
The Israeli air force launched air strikes on the Gaza Strip early Wednesday after militants in the Palestinian territory sent incendiary balloons into southern Israel, security sources and witnesses said.
Hamas's warnings appeared to hinge on whether or not the march would pass through the Damascus Gate and into the heart of the Muslim Quarter of the Old City. The march was considered to be a provocation by Hamas, which urged Palestinians to "resist" the parade.
Israel's annexation of east Jerusalem since the Six-Day War of 1967 is not recognised by most of the worldwide community which says the city's final status should be a matter of negotiation between the two sides.
Though there were concerns the march would raise tensions, canceling it would have opened Mr Bennett and other right-wing members of the coalition to intense criticism from those who would view it as a capitulation to Hamas.
"We warn of the risky repercussions that may result from the occupying power's intention to allow extremist Israeli settlers to carry out the Flag March in occupied Jerusalem tomorrow", Shtayyeh tweeted in English.
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.
Tensions between Israeli settlers and Palestinians are again rising which threatens to bring about a new round of clashes, UN Special Coordinator for the Middle East Peace Process Tor Wennesland has warned.
Far-right Religious Zionism party lawmaker MK Itamar Ben Gvir visits the Damascus Gate of the Old City of Jerusalem, June 10, 2021.
The terror group also called on Palestinians to "confront Israeli settlers" during the march. Palestinian protesters repeatedly clashed with Israeli police over restrictions on public gatherings during the Muslim holy month of Ramadan in April and May.
The air strikes marked the first major flare-up between Israel and Palestinians in Gaza since a ceasefire on May 21 ended 11 days of war that killed 260 Palestinians, according to Gaza authorities, and 13 people in Israel, the police and army there said.
The iconic Al-Aqsa Mosque compound in the heart of the Old City is Islam's third holiest site and a national symbol for all Palestinians regardless of religion.
Abu Malek, one of the young men launching the balloons, called the move "an initial response" to the march.
In a statement, the Israel Defense Forces (IDF) said its fighter jets had hit military compounds operated by Hamas in Khan Yunis and Gaza City.