by Southeast Asia correspondent Zoe Daniel, wires
More than 1,600 people have been arrested as tens of thousands gathered in central Kuala Lumpur and police attempted to disperse the demonstrators.
Despite being granted a permit to use the venue, the activist rally was declared illegal.
Police have attempted to lock down the city, blocking major roads and entry points.
At least a dozen people were hurt in the 50,000-strong demonstration.
There were no reports of serious injuries but some analysts said the police action was excessive and would dent prime minister Najib Razak's image.
"We are not criminals, we are just asking for free and fair elections," opposition leader Anwar Ibrahim's daughter, Nurul Izzah Anwar, told reporters after her father was knocked down and hurt in a melee when he and his supporters were tear gassed.
The protesters, who fall under the banner of the Bersih 2.0, or clean movement, want electoral laws changed ahead of the next election.
The movement is a loose grouping of non-government organisations and its leaders are attempting to march to a stadium despite being banned from the city.
They say gerrymanders, laws on group gatherings, and unbalanced media coverage skew polls towards the ruling party.
Pro-government groups, however, say the protest is an opposition rally in disguise.
Witnesses say they saw tear gas shells being lobbed at three groups of protesters as the crowds chanted "Long Live the People" and "Reform".
Several people were seen bleeding after the tear gas was fired. Crowds around the city's main bus station were also sprayed with water cannons.
Police said more than 1,400 people were taken into custody, including two top leaders of a group that organised the rally, Ambiga Sreenivasan and Maria Chin Abdullah.
"We are fighting for free and fair elections," said Ambiga Sreenevasan, the head of the Bersih group.
"The government uses might, we use our right. Our right will eventually prevail."
Street protests are rare in the South-East Asian nation, and foreign investors are worried that political unrest could delay economic reforms seen as essential to draw investment.
If he is put under popular pressure, Mr Najib may reconsider a snap election and hold back on reforms such as cutting fuel subsidies or unwinding an affirmative action program for the country's Malay majority.
Polls are not due until 2013 but analysts have said Mr Najib is likely to seek an early mandate after economic growth accelerated to a 10-year high in 2010.
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