They say the discovery proves an ancient cemetery at the site that has been at the center of protests by ultra-Orthodox Jews does not contain the graves of Jews.
Protesters claim an emergency room extension at Barzilai Hospital in the city of Ashkelon is being built on an ancient Jewish cemetery. They demonstrated there when officials began removing graves this week, and rioting erupted in ultra-Orthodox areas of Jerusalem.
The Israel Antiquities Authority said Thursday the discovery of the 2,000-year-old incense altar, along with the nature of the graves, shows the cemetery was pagan.
Israeli antiquities authorities operating under heavy police guard began relocating ancient graves on Sunday.
Officers forcibly carried off dozens of demonstrators who had staged a sit-in to try to stop the work outside Barzilai Hospital in the southern city of Ashkelon. Police spokesman Micky Rosenfeld said 30 protesters were arrested.
A fence surrounding the hospital was topped by barbed wire to keep out demonstrators, and police set up checkpoints at the entrances to the city to ward off any major inflow of protesters.
The operation, which got under way after weeks of political wrangling, took place under the guard of hundreds of police deployed in the area in anticipation of possible violence.
But ultra-Orthodox rabbinical leaders did not call for a major protest, Deputy Health Minister Yaakov Litzman told Israel Radio. Yaakov is an ultra-Orthodox Jew who had opposed the graves transfer.
Police also stepped up patrols in ultra-Orthodox neighborhoods in Jerusalem, where protesters set fire to trash bins on Saturday night and Sunday morning. In retaliation for attacks on city workers and destruction of property, Jerusalem Mayor Nir Barkat late Sunday suspended city services to the neighborhoods.
After the graves were discovered, Israel's Cabinet - under pressure from ultra-Orthodox coalition members - voted to relocate the planned facility. But Prime Minister Benjamin Netanyahu reversed that decision and told his Cabinet Sunday that "the general good" trumped the ultra-Orthodox concerns.
Ashkelon is not far from the Gaza Strip, and doctors had warned that if Palestinian militants again fire rockets at the city, the trip between the hospital and a separate emergency room would be dangerous.
The relocation also would have cost millions of dollars.