The Israelis of Palestinian origin were seen carrying Palestinian flags and others holding up signs demanding the right to return for refugees at the rally in the Negev desert.
Organisers said it was the first time such a demonstration has been held in the Negev.
Israeli Jews, in contrast, celebrated in public parties in two very different sets of reactions to the 68th anniversary of Israel's founding.
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Israelis hail independence day as what they call the reformation of the Jewish state.
For Palestinians, however, the events of 1948 are seen as a "nakba" -- catastrophe in Arabic -- as more than 760,000 Palestinians, estimated today to number about 5.5 million with their descendants, fled or were driven from their homes.
The Nakba will be formerly marked on May 15.
Marchers carried the slogan "On the anniversary of your independence, remember our nakba."
For the Palestinians, the right to return to homes they fled or were forced out of is a prerequisite for any peace agreement with Israel, but it is a demand the Jewish state has rejected out of hand.