Dominique de Villepin, the prime minister, hopes that the First Employment Contract (CPE) will reduce youth unemployment from the current 22.8%, but union and student leaders say it will create a generation of "throwaway workers" because it makes it easier to dismiss young employees in a trial two-year period.
Unions claimed a bigger turnout on Tuesday than on the last day of worker-student demonstrations on March 18.
In the southern city of Marseille, about 250,000 people took to the streets, according to organisers, waving banners reading "We will not give up". In Grenoble, in the east, 60,000 rallied, and 40,000 protested in Pau in the southwest, unions said.
The biggest demonstration was to start from the Place d'Italie in Paris and thousands of police were on high alert for fresh outbreaks of trouble.
Previous marches in the capital have ended in running battles between police and rioters. On Thursday gangs of youths from Paris's poorer suburbs smashed windows, set fire to cars and mugged demonstrating students on the Invalides esplanade.
Visiting a police station near the route of Tuesday's march, Nicolas Sarkozy, the interior minister, told officers that their task was "first to protect the demonstrators, second to arrest as many hooligans as possible, and third to protect passers-by and shops".
Trade unions and student groups had vowed a "black Tuesday" in their three-week campaign against the CPE, but disruption to transport was lighter than feared.
In Paris, 70% of city metro trains and buses were running normally and more than half of suburban commuter trains. Nationwide, two out of three TGV high-speed trains were operating and half of other rail services, according to the state-owned SNCF.
The civil aviation authority said a third of flights from French airports were cancelled, but most of those were domestic services. Airports around Paris were reporting delays of around half an hour on some flights.
Public transport was affected in around 70 towns and cities, while the airport in the southwestern town of Pau was closed. Schools, post offices, banks, government and benefit offices were all disrupted, and no newspapers were published.
Meanwhile, unions turned down an invitation from de Villepin to attend afternoon talks on the contested contract, which was voted through parliament two weeks ago and is awaiting approval.
Unions and student groups are demanding withdrawal of the CPE, but the prime minister is offering only "adjustments" on its two most contentious aspects: a two-year trial period, and the free hand given to employers during that period to sack people aged 26 and under without explanation.
Francois Chereque, of the CFDT union, told RMC Info radio that he would not return to talks if de Villepin did not withdraw the CPE. "How do you want us to go [to meet Villepin] if he is giving us as precondition that we accept the CPE," he said. "After two months of conflict, this precondition is unacceptable."
"How do you want us to go [to meet Villepin] if he is giving us as precondition that we accept the CPE ... After two months of conflict, this precondition is unacceptable"
De Villepin reiterated his refusal to withdraw the CPE on Tuesday, telling deputies in the Union for a Popular Movement (UMP) party that he was open only to modifications introduced outside the framework of the law.
But there were clear signs of division inside UMP ranks, with Sarkozy - who heads the party and is de Villepin's rival for leadership of the political right - urging suspension of the contract pending more talks with unions and employers.
An Ipsos poll this week for Le Monde newspaper gave some comfort to the prime minister, who has staked his political career on getting the CPE into law and is a potential candidate in next year's presidential election.
While 63% of those polled disapproved of his decision to stand by the CPE, views were heavily influenced by political allegiance. About 74% of UMP voters supported his position.
In addition, 50% overall favoured keeping the CPE "with adjustments" compared with 44% who wanted it completely scrapped. Only 37% believed that de Villepin would end up withdrawing the contract.