The Magen David Adom ambulance service said its medics were treating two people in the Silwan neighbourhood, near Jerusalem's Old City.
A 23-year-old man was in a serious condition and a 47-year-old man's condition was defined as moderate to serious.
Police said the victims were father and son and that the shooter was a 13-year-old Palestinian boy from East Jerusalem. He was "neutralised and injured" by armed civilians and taken to hospital.
Israel's Prime Minister Benjamin Netanyahu pledged on Saturday a "strong, swift and precise" response to the latest spate of violence, as its military sent more troops into the occupied West Bank.
"We are not seeking escalation, but we are prepared for any scenario," Mr Netanyahu said as he convened his security cabinet which he said would seek an increase in gun permits for licensed civilians to defend against street attacks.
The attack came after police arrested dozens of people in connection with the shooting in the Neve Yaakov settlement in East Jerusalem on Friday evening in which seven people died and 10 were wounded.
Police identified the gunman in that attack as a 21-year-old resident of the At-Tur neighbourhood of East Jerusalem, which Israel annexed after the 1967 Arab-Israeli War.
There has been no indication that he had prior involvement in militant activity or was a member of an established Palestinian armed group.
He was killed by police following a brief chase.
Police said they had arrested 42 people “for questioning” overnight. They said some of them were members of the gunman's family.
Others detained included residents of the attacker's neighbourhood.
The force is on the “highest level” of alert after the attack in Neve Yaakov.
The shooting took place as worshippers attended Shabbat services on International Holocaust Remembrance Day.
Prime Minister Benjamin Netanyahu said he had held a security assessment and decided on “immediate actions”.
He said he would discuss a further response with his Security Cabinet on Saturday night, after the end of the Shabbat, and called on the public not to take the law into their own hands.
The Neve Yaakov shooting came a day after 10 people including civilians were killed during an Israeli army raid in the Palestinian city of Jenin in the occupied West Bank.
Palestinian militants in the Gaza Strip fired rockets at Israel early on Friday, prompting Israeli air strikes on the territory.
The military announced on Saturday that it would move an extra battalion into the West Bank,
The US condemned Friday's shooting, which occurred days before a visit to the region by Secretary of State Antony Blinken.
“This is absolutely horrific,” said State Department spokesman Vedant Patel.
“We condemn this apparent terrorist attack in the strongest terms. Our commitment to Israel's security remains ironclad, and we are in direct touch with our Israeli partners.”
Mr Patel said there would be no change in Mr Blinken's travel plans. He plans to meet the leaders of Israel, the Palestinian Authority and Egypt, starting on Sunday.
President Joe Biden asked his national security team to “offer all appropriate support in assisting the wounded and bringing the perpetrators of this horrible crime to justice,” White House Press Secretary Karine Jean-Pierre said.
“The United States will extend our full support to the government and people of Israel,” she said.
UN Secretary General Antonio Guterres said he was “deeply worried” by the current escalation of violence and urged “utmost restraint”, spokesman Stephane Dujarric said.
“The Secretary General strongly condemns today's terrorist attack,” Mr Dujarric said on Friday night. “It is particularly abhorrent that the attack occurred at a place of worship, and on the very day we commemorated International Holocaust Remembrance Day.”
UK Foreign Secretary James Cleverly also condemned the attack.
“To attack worshippers at a synagogue on Holocaust Memorial Day, and during Shabbat, is horrific. We stand with our Israeli friends,” he tweeted.
The UAE strongly condemned the attack in a statement issued by the Foreign Ministry.
Months of violence in the West Bank have heightened fears that the already unpredictable conflict may spiral out of control, ending in a broader confrontation between Palestinians and Israel.
The latest violence began under the previous coalition government and has continued following the election of Mr Netanyahu's new right-wing administration, which includes ultranationalist parties that want to expand settlements in the West Bank.