Around 25 people were believed to be inside the synagogue at the time of the attack.
Television footage showed paramedics assisting wounded worshippers and a bloodied butcher's knife near the scene of the attack, which was surrounded by police.
Yosef Posternak, who was at the synagogue at the time told Israel Radio: "I saw people lying on the floor, blood everywhere. People were trying to fight with (the attackers) but they didn't have much of a chance," he said.
Police spokesman Micky Rosenfeld said it wasn't immediately clear what weapons the suspects used to attack the worshippers at the synagogue. Israeli media reported the attackers were armed with axes and knives, although initial reports said the attackers were armed with guns.
Another police spokeswoman, Luba Samri, said the attackers, who media reports described as cousins, were Palestinians from east Jerusalem, which has been the scene of repeated clashes between Israeli police and Palestinian protesters in recent months.
Soon after the attack, dozens of police officers gathered outside the Abu Jamals' home. Samri said this was part of the police investigation. She said residents threw stones at the police officers.
The latest violence comes after ongoing reprisal violence between Israelis and Palestinians in the city, which is divided between a largely Arab east and a mostly Jewish west. Tuesday's attack took place at a synagogue in west Jerusalem.
I recent weeks tensions have grown largely over the flashpoint of Jerusalem’s holiest site — known as Temple Mount to Jews and the Noble Sanctuary to Muslims.
Palestinians are angry at what they say are repeated attempts by right-wing Jews to enter the compound housing the al-Aqsa mosque.
"Everyone expected this to happen. Jerusalem is boiling," Ghazi Hamad, a senior Hamas official, told Al Jazeera.
"Yesterday, the Israeli forces demolished the houses of the Palestinians who attacked Israelis but they never punish Israeli attackers. We are expecting more violence."
Earlier this year, tension boiled over into a 50-day Gaza war, which left more than 2,100 Palestinians and 71 Israelis dead.
With wire services