For the second time in 15 months, leading reformist group Bersih has organised a demonstration to demand Najib resign and face justice over allegations that billions were looted from his brainchild investment fund, 1MDB.
Tensions have spiralled in recent weeks following threats by the rightist "Red Shirts" group to confront their "Yellow Shirts" opponents.
The government arrested the leaders of both sides in the hours leading up to the rally, but it was unclear if the crackdown would further inflame the situation.
Riot police were seen at potential flashpoints and traffic in and around the capital was crippled by a maze of road closures put in place overnight. No violence was initially reported.
"We want a clean government. We want fair elections," said Derek Wong, 38, a real estate agent who was among thousands of high-spirited Bersih marchers, many banging drums and blowing vuvuzelas.
"As a citizen I am now here peacefully to decide the future of the country. We hope to see Najib removed and charged in court."
Bersih, which means "clean" in Malay, is an alliance of scores of NGOs and civil-society groups that has staged several protests over the years demanding electoral reform, but has since shifted focus to 1MDB.
In August 2015, Bersih drew tens of thousands of supporters to two days of peaceful protests in Kuala Lumpur and other locations to demand Najib's removal.
Malaysia has been seized for more than a year by the 1MDB scandal, which has sparked investigations in several countries.
Najib, 63, and 1MDB deny wrongdoing.
But the US Justice Department -- which in July filed lawsuits to recover assets it says were purchased with stolen 1MDB money -- laid out evidence that an unnamed top Malaysian official was deeply involved in the theft.
A Malaysian Cabinet official has since admitted that individual was Najib.
Najib last year shut down Malaysian investigations. Critics say he has lurched toward autocracy to stifle the scandal, arresting opponents and throttling media.
In a radio address Friday, Najib dismissed Bersih as a "deceitful" scheme "to unseat a democratically-elected government".
Police on Friday arrested Bersih leader Maria Chin Abdullah, one of several reformists and opposition politicians detained.
Amnesty International called the arrests "the latest in a series of crude and heavy-handed attempts to intimidate Malaysian civil society activists and other human rights defenders".
Overnight, authorities also nabbed Red Shirts leader Jamal Yunos, who has warned of potential violence when his supporters confront Bersih.
Bersih's Yellow Shirts were to march toward Kuala Lumpur's symbolic Independence Square -- which has been sealed off by police -- to hold their demonstration.
By M Jegathesan
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