The protesters accused the service and its Bethlehem chief Tariq al-Wahidi of protecting a Palestinian who gave Israel information, which led to the killing of two resistance fighters last April.
Ziyad Shahin was transferred to Israel last week after four months in Palestinian detention.
The two Palestinians killed last spring were the local head of al-Aqsa Martyrs Brigades, Mahmud Salah and one of his lieutenants, Anan Jawarish.
The group, an offshoot of Palestinian leader Yasir Arafat's mainstream Fatah party, issued a statement on the fringes of the demonstration, accusing Wahidi of having "sold the two martyrs" by handing over the alleged collaborator.
"Soon after his arrival in the governorate, he became a landowner, accumulating palaces and capital. It is the retribution of his betrayal, his allegiance to his masters and the protection he grants to collaborators," it said of Wahidi.
Bethlehem Governor Zuhayr Manasra met the demonstrators, mobilised by Fatah, and promised to open an investigation into the allegations.
The Israeli army refused to comment on the issue.
Security control was handed back to the Palestinian Authority in Bethlehem in early July.
The military intelligence service is headed by General Musa Arafat, a cousin of Yasir Arafat.