Demonstrators marched in defiance of Najib's administration, which 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 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.
The demonstrators dispersed after a five-hour standoff with police. Only several hundred reached the stadium.
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.
Police said in a statement that they detained 672 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.
Witnesses said riot police armed with batons charged at some protesters and dragged them into trucks. Some were seen bleeding, but police could not confirm any injuries.
Anwar Ibrahim, Malaysia's top opposition figure, said on Twitter that he sustained a "minor injury" when his group was hit by tear gas. The Malaysiakini news website said he had a knee injury.
The crackdown "stirred a sense of outrage against the exhibition of raw power by our government," Bersih coalition leader Ambiga Sreenavasan told reporters.
"What is the necessity for a show of might against right? No matter what, right will always prevail," she said, minutes before police detained her and other Bersih officials as they walked to the stadium.
As the afternoon progressed, activists estimated the total number of demonstrators exceeded 20,000 people, making it Malaysia's biggest street rally since 2007. Some independent news websites estimated there were tens of thousands of people, but authorities did not immediately have an official figure.
The rally has galvanized the opposition and has been credited for a surge in political awareness among the public in recent weeks.
Government officials accuse Anwar's three-party alliance of endorsing the rally to cause chaos on the streets and undermine the National Front.
Over the past two weeks, more than 200 other activists have been arrested nationwide for trying to promote the rally. Six are being held under security laws that allow indefinite detention without trial. Most of the others were eventually released, but some were charged with laws banning activities linked to illegal assemblies. They face several years in prison if convicted.
The activists' demands include an overhaul of voter registration lists, tougher measures to curb fraud and fairer opportunities for opposition politicians to campaign in government-linked media. The National Front's mandate expires in mid-2013 but many analysts expect elections to be called by next year.
Supporters of the Bersih coalition were also planning solidarity marches over the weekend in foreign cities, including in Australia, Britain, France, Hong Kong, Indonesia, Japan, the Philippines, South Korea, Thailand and the United States.
In Washington, State Department spokeswoman Victoria Nuland said the U.S. has been communicating to Malaysia the importance of respecting human rights, including freedom of expression and assembly.
"We consider it incumbent on all sides to refrain from violence," she told a news conference Friday.
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Associated Press writer Matthew Pennington in Washington contributed to this report.
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