Television images showed a small group of PEGIDA demonstrators hemmed into a cordoned-off area of the southern city's central square, surrounded by anti-racism protesters.
"There are at least 3,000 thousand, most of them counter-demonstrators" Malmoe police spokesman Lars Foerstell told AFP, adding that there were about 30 PEGIDA protestors.
"The support is much greater than that," PEGIDA's Swedish leader Henrik Roennquist told public broadcaster SVT putting the number at 150.
Malmoe is Sweden's third city and home to a growing population of Muslims as the country receives the highest proportion of refugees in Europe per head of population.
"There is an unmet need for this in Sweden. It's not about racism, it's not about shutting out immigrants. It's about our values and traditions," said Roennquist.
Police refused to grant PEGIDA a permit to march and only allowed the group to hold a "stationary demonstration" in the city.
"A march would have had too much impact on the neighbourhood," Lars Foerstell said.
But numbers have fallen since the movement's founder stepped down on January 21 after a picture surfaced of him posing as Adolf Hitler. Other senior figures have also since resigned.
Small offshoots of PEGIDA have sprung up in other German cities and marches have taken place in the Czech Republic, Austria, Denmark and Norway, involving however only a few hundred people and generally dwarfed by far larger anti-racism rallies.
