The four popularly elected legislators, who led the rally, were the latest targets of a government move which pro-democracy parties describe as a witch hunt.
It came after the city's courts ousted two pro-independence lawmakers for failing to swear their oaths of office correctly, a move backed by Beijing.
The Hong Kong government now wants to bar the other four legislators for alleged breaches in their swearing-in ceremony and in their oaths of allegiance.
"This has shown that 'One Country, Two Systems' is a failure and we should use the 20th anniversary of the handover to reflect on our political situation."
Britain handed Hong Kong back to China in 1997 under a deal which gives it broad autonomy and preserves its freedoms and the rule of law for 50 years. But there are fears these freedoms are being eroded by Beijing.
"Particularly, that our next generations will enjoy the freedoms that I have enjoyed before."
Court proceedings against the four are scheduled to start in February.
Organisers of the march said 9,150 people attended, while police estimated an maximum attendance of 4,800.
A 1,200-strong pro-Beijing committee will elect Hong Kong's next leader in March.
The current unpopular chief executive Leung Chun-ying has announced he will not seek re-election, citing family reasons.
Today's rally also sought to raise funds for the four lawmakers to fight the government's challenge in court.
The two ousted pro-independence lawmakers separately announced last week they were making a final legal bid to overturn their exclusion from the legislature.
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