The anniversary event was billed as a show of national unity after the Islamists of Hamas struck a reconciliation agreement last month with the rival Fatah movement founded and led by Arafat until his death in 2004.
The deal, which is supposed to see Hamas cede civil control of Gaza to the Palestinian Authority led by current Fatah leader Mahmud Abbas by December 1, ended years of bitter division between the rival factions.
Participants waved Palestinian flags and placards calling for unity, as well as pictures of both Arafat and Abbas.
"Today is a day for loyalty, unity and reconciliation. We say to the president and the government: Your sons in Fatah are waiting for your support of Gaza," said 20-year-old Shukri Antar.
Rania Barbekh, 50, who was carrying a Fatah flag and a picture of Abbas, said she and her son had arrived at the square at 7 am from their home in Khan Yunis in the south of the Gaza Strip.
Hamas seized control of Gaza in a near civil war with Fatah in 2007 amid bitter recriminations over the Islamists' landslide victory in parliamentary elections the previous year.
The last commemoration in the territory of Arafat's death was held just months afterwards and ended in clashes between the rival factions.
Fatah has held other events in Gaza since 2007, including a major celebration in 2013, but Hamas has often suppressed its activities.
On Friday, hundreds of people took part in a "national unity marathon" organised by the Palestine Athletic Federation to support reconciliation between the rival factions.
Tawfiq Abu Naim, head of Hamas's internal security forces in Gaza, said he had instructed them to protect and support today's commemoration, which he described as a "festival of unity".
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