The protesters urged President Roh Moo-Hyun to cancel the deployment of more than 3000 South Korean troops on a relief and rehabilitation mission.
They carried placards reading "Scrap South Korea-US alliance", and called on the president to resign.
They also shouted slogans calling for closer inter-Korean relations. Riot police using dozens of buses formed a tight blockade around the embassy.
South Korean troops are to be deployed in Irbil, a Kurdish-controlled town in northern Iraq, for several weeks beginning this month.
The beheading of Kim Sun-Il, a 33-year-old South Korean citizen, in Iraq in June fuelled anti-war protests in Seoul, but the government vowed to push on with the troop dispatch.
South Korea has imposed a tight media blackout concerning the politically sensitive dispatch of troops, the third largest foreign force in Iraq.
Police have battled protesters
near the US embassy
The government warned it would consider legal action - using a law to protect military secrets - against any media outlet that violated the ban.
Foreign Minister Ban Ki-Moon said the decision had been taken because the "security of South Korean troops and civilians was paramount".
South Korea remains the only country among those with troops in Iraq to impose such a blackout.