AFP journalists at the scene saw the damage just a few hundred metres from Jerusalem's revered holy sites of Al-Aqsa Mosque, the Western Wall and the Church of the Holy Sepulchre.

Police cordoned off the site in the Jewish Quarter of the Old City shortly after several loud blasts had rocked the centre of Jerusalem.

"The Old City in Jerusalem, right near the Temple Mount, was impacted by Iranian missile fragments," the Israeli military wrote on X.

Israeli Old City police commander Dvir Tamim said the blast was caused by a "missile impact and not interceptor fragments".

He said the bomb squad was checking to verify "what kind of missile" it was.

Israel's foreign ministry accused Iran of an "attack on the holy sites" of Jerusalem.

"The Iranian attack on the holy sites sacred to all three religions reveals the madness of the Iranian regime, which claims to be religious," Israel's foreign ministry wrote on X, calling it an "Iranian gift" for the Muslim holiday of Eid al-Fitr.

A resident in a nearby district told AFP that they saw an object falling straight from the sky before hearing a loud bang and seeing white smoke rise into the air.

Israeli police said in a statement that one person was evacuated after receiving minor injuries in the blast.

Local resident Devorah Abramson, 48, told AFP that the blast "blew pieces of debris to the nearby field all the way, like, pretty far from where it fell."

"So it's scary," she said.

The damage in the Old City comes after Israeli police said this week that shrapnel had fallen in the area following another Iranian missile attack.

Iran has been firing barrages of missiles at Israel in response to the bombing campaign by Israel and the United States that started on February 28.

Air raid sirens sounded repeatedly in Jerusalem and Tel Aviv on Friday.

At least two people were injured near Tel Aviv, according to the emergency services, while media broadcast footage of a residential building ablaze in a nearby town.