The opposition-backed rally was the culmination of weeks of intense pressure on Prime Minister Najib Razak's long-ruling coalition to make election laws fairer and more transparent ahead of national polls widely expected by mid-2012.
Demonstrators marched in defiance of Najib's administration, which has declared the rally illegal and warned people repeatedly to avoid it.
Opposition leaders accuse Najib's National Front coalition of relying on fraud to preserve its 54-year grip on power, which has been eroded in recent years amid mounting complaints about corruption and racial discrimination. The government insists the current electoral policies are evenhanded.
Authorities took extraordinary security measures to deter Saturday's rally by sealing off roads, closing train stations and deploying trucks mounted with water cannons near the Independence Stadium in downtown Kuala Lumpur, where activists sought to gather.
Nevertheless, thousands tried to reach the stadium from various parts of Kuala Lumpur, chanting "Long live the people" and carrying yellow balloons and flowers as they marched.
Police fired numerous rounds of tear gas and chemical-laced water in repeated attempts to disperse the crowds, causing demonstrators to scatter into nearby buildings and alleys before they regrouped. Police helicopters flew overhead as a brief downpour failed to deter the protesters.
Najib insisted Saturday the protesters only represent a minority, and that most Malaysians support his administration.
"If there are people who want to hold the illegal rally, there are even more who are against their plan," the prime minister was quoted as saying by the national news agency, Bernama.
The federal police force said in a statement that it detained 670 people in a clampdown called "Operation Erase Bersih," referring to the Bersih coalition of civic groups organizing the rally. Those arrested included several senior opposition officials.
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