Benedict will become the first pope to enter the Dome of the Rock on Al-Haram Al-Sharif (the Noble Sanctuary), also known as the Al-Aqsa Mosque compound, which is Islam's third holiest spot.
The site, which the Jews call Temple Mount, is also the holiest in Judaism and has been a major flashpoint in the Israeli-Palestinian conflict, where the latest Palestinian uprising erupted in 2000.
Pope John Paul II had visited the compound during his landmark 2000 pilgrimage to the Holy Land, but did not enter the Dome of the Rock, whose huge golden cupola is seen as Jerusalem's main landmark.
Benedict will meet the mufti of Jerusalem at the mosque compound, before heading to the Western Wall which it overlooks.
Also known as the Wailing Wall, the sacred site is the top pilgrimage destination for the world's Jews.
He will then hold talks with the two chief rabbis of Israel.
In the afternoon, the pope will celebrate mass in Jerusalem's Valley of Kidron, between the Mount of Olives and the walls of the Old City. Many Christians believe this is the Biblical Valley of Jehoshaphat where God will sit in divine judgement at the end of time.
Benedict will also meet representatives of the various Catholic rites, which include Melkites, Maronites, Chaldeans, Armenians and Syrians.
On Monday, Pope Benedict XVI prayed at a Holocaust memorial in Jerusalem, where he said the suffering of Holocaust victims should never be forgotten, denied or belittled.
The German pontiff called the Nazi murder of six million Jews a "horrific tragedy."
The Yad Vashem visit and his remarks were seen as key to repairing Israel-Vatican ties which have been strained over his backing for the beatification of controversial Nazi-era Pope Pius XII and lifting the excommunication of a Holocaust-denying bishop.
At Yad Vashem, Benedict stayed away from an area where a caption under a photo of Pius XII says the war-time pope failed to protest against the Holocaust -- a stance that has angered the Vatican which disputes the claim.
Benedict himself has stirred unease in Israel, in part because of his past in the Hitler Youth, which he said he was forced to join.
Upon arrival from Jordan at the start of his visit, Benedict spoke out against anti-Semitism.
"Sadly, anti-Semitism continues to rear its ugly head in many parts of the world," he said. "This is totally unacceptable. Every effort must be made to combat anti-Semitism wherever it is found."
Benedict also appealed for Israelis and Palestinians to resolve their conflict that has caused decades of bloodshed.
"I plead with all those responsible to explore every possible avenue in the search for a just resolution of the outstanding difficulties so that both peoples may live in peace in a homeland of their own within secure and internationally recognised borders," he said.
Israel's hawkish new Prime Minister Benjamin Netanyahu, who visited Egypt on Monday on his first foreign trip since taking office in March, has so far failed to publicly support Palestinian statehood.
The pope stressed that with "trust, nurtured in justice and integrity," people can recognise each other as equals.
"In this way does not society itself become the 'fruitful field' marked, not by blocks or obstructions, but by cohesion and vibrancy?" said Benedict who on Wednesday will visit Palestinian refugees in the West Bank city of Bethlehem just a stone's throw from Israel's separation barrier.
Benedict's trip is a mainly pastoral visit aimed at encouraging the dwindling Christian population to stay in the Holy Land, as well as promoting peace.
The Palestinians hope to use his visit to highlight their plight, with the West Bank still under Israeli occupation and Gaza in ruins from Israel's devastating war on the territory in December-January.
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