At mid-day Friday, Israeli authorities gave the protesters 24 hours to leave the encampment, which they named Bab al-Shams, said police spokesman Micky Rosenfeld.
"The notices were given out to all the activists here that they were trespassing," Rosenfeld told CNN.
Shortly after midnight, more than 500 police officers descended on Bab Al-Shams to carry out the evacuation order. More than 60 protesters were taken into custody.
Around 5 a.m. Sunday (10 p.m. ET Saturday), all those detained had been released, said activist Abir Kopty.
Israel's Supreme Court ruled Friday that the Palestinian outpost, built in the geographically sensitive area known as E1, could remain for six days while the issue of the removal of the tents was being discussed. But a police spokesman said the ruling allowed for the removal of the protesters even if the tents, for now, will stay.
Netanyahu said he had ordered the area sealed off to prevent clashes, Reuters reported.
"I immediately called for the area to be closed off so there would not be large gatherings there that could cause friction and breach the public order," he told Army Radio.
In an interview on Israeli radio, Netanyahu said "there will construction" in the disputed E-1 zone between Israeli-occupied East Jerusalem and the major West Bank Jewish settlement of Maaleh Adumim, the Voice of America reported. But, he added it will take time to complete the planning process for thousands of housing units.Israeli security personnel entered the zone before dawn Sunday and removed dozens of Palestinians who had set up tents Friday to protest the proposed settlement project. Netanyahu told a Cabinet meeting he ordered the eviction to prevent anyone from impinging on Israel's claim to territorial "contiguity" between Jerusalem and Maaleh Adumim.
Palestinians claim East Jerusalem as the capital of a future state that they say should include all of the Israeli-occupied West Bank, including the E-1 zone. Palestinian activists said some protesters were hurt as Israeli authorities forcibly cleared the disputed site, which Rosenfeld denied. They also vowed to continue their protests against the settlement plan."We are taking back this area, that is private Palestinian land, and building our own village," activist Irene Nasser told CNN. "We can just look over (at other Israeli settlements) and see what this land might potentially look like, if we don't actually (take) things into our own hands."
Palestinians say the proposed E-1 settlement's location at the center of the West Bank would make it impossible for them to form a state with viable borders and would block Arab access to East Jerusalem.
"The eviction and the exercise of force is another indication that Israel is defying the international consensus on the need to vacate occupied Palestinian land," Palestinian government spokesman Nour Odeh said.