Is it possible to reduce inertial sensor noise by adjusting gazebo parameters?

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It's an error inherent in the existing LCP solver given performance requirements. You can run simulation slower to get better results. For example, figure below from running:

roslaunch atlas_utils atlas.launch
rxplot /atlas/imu/linear_acceleration/z

If you increase physics->solver->iterations from default of 40 to 80, the oscillation magnitude decreases (the spike is just an artifact of parameter update):

Setting iterations to 500 reduces oscillation magnitudes even further:

Alternatively, you can low pass filter the data. As an extremely crude example, exponential filter where

accel(new) = (1 - e) * accel(new) + e * accel(old)

where e = 0.9 leads to: