The wounded Israeli was a civilian security guard in his 20s, who was posted to the city's main entrance road.
The attacker was identified as a Palestinian woman from Bethlehem, 22-year-old Halawa Alian.
She was shot by the victim after stabbing him, and conflicting reports first suggested she may have been killed. The IDF said she was still being treated by medics who were evacuating her to hospital.
As per police regulations, the woman lay on the sidewalk until a police sapper team confirmed she was not wearing an explosive device. Only then were medics allowed to treat her.
Israeli reports said she was moderately wounded and has been taken to Jerusalem's Hadassah Hospital Ein Kerem.
A security video from the scene showed the woman approaching the entrance gate to the city, starting a conversation with the guard, then pulling a large knife from her purse and lunging at him.