By Jeffrey Heller and Suleiman Al-Khalidi
JERUSALEM/AMMAN, Nov 5 (Reuters) - Increasing strife over Jerusalem's most volatile holy site plunged relations between Israel and Jordan into crisis on Wednesday with Amman recalling its ambassador for the first time since the countries' 1994 peace treaty.
In a sign of festering tensions, a Palestinian rammed his car into pedestrians in Jerusalem's city center on Wednesday, killing an Israeli paramilitary border policeman before he was shot dead by police. More than a dozen people were injured.
The incident occurred after fierce clashes between Israeli police and Palestinians at the entranceway to the 8th-century al-Aqsa mosque, Islam's third most sacred place.
Palestinian officials said Israeli forces had crossed the threshold of the mosque for the first time since 1967. Israeli police denied going into the house of worship.
Just as Israel was grappling with the second deadly Palestinian attack in Jerusalem in two weeks - and the risk of a third Palestinian uprising - Jordan added a new dimension to the conflict by recalling its envoy.
The decision was taken "in protest at the increasing and unprecedented Israeli escalation in the Noble Sanctuary, and the repeated Israeli violations of Jerusalem," the Arab kingdom's official Petra news agency said.
It also said Jordan would lodge a complaint with the U.N. Security Council over Israeli actions in the city and at the compound known to Muslims as the Noble Sanctuary, housing the al-Aqsa mosque and golden Dome of the Rock shrine. Muslims believe the Prophet Mohammed rose to heaven from the 7th-century Dome of the Rock.
Jews revere the hilltop in Jerusalem's walled Old City as Temple Mount, Judaism's holiest place, where two Biblical temples once stood.
There was no immediate reaction from Israeli leaders to Jordan's dramatic step, a little over a week after Israel and Jordan marked the 20th anniversary of their peace treaty.
At a ceremony on Oct. 26 recognizing the milestone, Jordanian Ambassador Walid Obeidat sounded a cautionary note over a campaign by Israeli ultranationalists to lift a de facto ban by Israel on Jewish prayer at the sacred compound.
Obeidat said that any change to the status quo there would ultimately imperil Israel's second peace accord with an Arab state, after a treaty with Egypt in 1979.
Israeli Prime Minister Benjamin Netanyahu has issued public assurances that he would keep existing arrangements for Muslim prayer in place at the compound. The site has been run by Jordanian religious authorities before and after Israel's capture of East Jerusalem from Jordan in a 1967 war.
But the push for change by several far-right Israeli lawmakers and settler activists has enraged Palestinians and drawn denunciation from their leaders.
The militant Islamist group Hamas claimed responsibility for the car ramming attack, saying it responded to "continued Zionist crimes" against al-Aqsa. Two weeks ago, a baby and a woman were killed in a similar road rampage in Jerusalem.
Last week, Israel closed the compound in Jerusalem's walled Old City amid increasing Israeli-Palestinian violence around it. The move infuriated Jordan's King Abdullah, who is the official custodian of the sacred compound.
The last full closure was in 2000, when the second Palestinian uprising, or Intifada, began shortly after the then Israeli opposition leader, Ariel Sharon, visited al-Aqsa.
Daniel Nevo, Israel's ambassador to Jordan, said the Israeli government was very sensitive to Amman's position on al-Aqsa and to the pro-Western kingdom's wider role in a Middle East increasingly torn by sectarian conflict.
"Our greatest fear nowadays is that someone is trying to create disturbances on the Temple Mount in order to ignite the region, in order to harm both Jordan and Israel," Nevo told Israel Radio.
"Jordan's prosperity and stability are a salient Israeli interest - and the other way around - because we are surrounded by many centers of insanity, both in Syria and in Iraq," he said. "I believe that the common interest of Israel and Jordan is to survive ISIS (Islamic State insurgents) and the extremists to the north and the east."
The right-wing Netanyahu, commenting on the latest attack in Jerusalem, said it was a direct result of what he termed incitement by Hamas and Western-backed Palestinian President Mahmoud Abbas over the situation at the holy compound.
A week ago, an Israeli advocate for Jewish prayer at the site was wounded by a Palestinian gunman, who was shot dead a day later by police searching for him. There have also been frequent clashes at the complex and elsewhere in East Jerusalem between Palestinian stone-throwers and Israeli riot police.
Peace talks between Israel and the Palestinians collapsed in April and since then Israel has announced plans to expand settlements in occupied territory where Palestinians seek statehood, with East Jerusalem as their capital.
A war in Hamas-run Gaza between the Israeli armed forces and Palestinian militants in July and August has also contributed to a polarization of the atmosphere. (Additional reporting by Dan Williams and Ari Rabinovitch in Jerusalem; Editing by Mark Heinrich)