The commemoration of the 58th anniversary of the "catastrophe" or Nakba in Arabic came as the Palestinian Authority president, Mahmud Abbas, was in Russia in an effort to shore up international financial and political support for his people.
"Our first priority is to lift the economic and political siege imposed on our people, then to end the occupation of our land once and for all, and to establish our independent Palestinian state," Abbas said in pre-recorded televised address.
The European Union and United States have cut direct aid to the Palestinian Authority since the Islamist movement Hamas formed a government in March.
Western powers want Hamas to recognise Israel's existence. Hamas says it will only do so if all Palestinian prisoners and seized territories are liberated and refugees allowed to return home.
About 700,000 Palestinians fled or were expelled from their land after the creation of Israel in 1948 and the ensuing Arab-Israeli war.
An additional 200,000 Palestinians underwent a similar fate during the 1967 Arab-Israeli war.
Abbas, who was meeting the Russian president, Vladimir Putin, accused Israel of "using every excuse possible" to convince the world that there is no Palestinian negotiating partner.
A Palestinian mural reading
'Nakba' in Arabic
He charged that Israel is making this up in order to go ahead with its plan to redraw its borders with the occupied West Bank and siphon off the largest Jewish settlements built on Arab land.
The plan, which the Israeli prime minister, Ehud Olmert, has pledged to implement with or without agreement from the Palestinians, "will practically destroy the concept of a two-state solution" to the Middle East conflict, Abbas said.
"The Israeli government must release Palestinian funds and refrain from implementing its unilateral plans, as this would destroy the prospects of a negotiated settlement for good, inflame the region and strengthen extremism."
Israel has stopped transferring import duties it collects on behlaf of the Palestinains worth $55 mllion a month.
Abbas' dire predictions came as a new survey indicated that 65% of Israelis and Palestinians believe no Middle East peace agreement is possible during Olmert's four-year term of office.
Palestinian MPs held a special session of parliament to mark Nakba Day which began with a minutes silence.
Demonstrations took place across the Gaza Strip and West Bank, as well as in refugee camps around the region.
"Our first priority is to lift the economic and political siege imposed on our people, then to end the occupation of our land once and for all, and to establish our independent Palestinian state"
Aziz al-Dwaik, the Hamas speaker of parliament, said the killings of six Palestinians by Israeli soldiers in the northern West Bank on Sunday conformed to a pattern that stretched back to 1948.
"The Zionist occupation must be held fully responsible for all the things that have befallen the Palestinian people," he told the policymakers.
"What happened yesterday in Jenin illustrates how the Israelis are continuing the aggressions that we have seen from the Nakba until today."
Right of return
In Gaza City, several thousand protesters gathered outside the local branch of parliament with banners demanding the right of return, maps of historic Palestine, wooden keys to former homes, and flags.
"We will never abandon the right of return," they shouted, criticising Olmert's border project in the West Bank and standing around a refugee tent erected in protest outside parliament.
The fate of the original refugees and their descendants, who are scattered throughout the occupied territories, neighbouring Arab countries and other parts of the world, has been one of the thorniest issues of the Palestinian-Israeli conflict.
Israel steadfastly opposes their right of return, aware that the demographics of the state could be overturned if all Palestinian refugees and their descendents move to modern-day Israel.
Palestinian fighters mark Nakba
Day in a Lebanon refugee camp
The UN estimates that there are more than six million Palestinian refugees in the world today, four million of which are registered with the UN agency for Palestinian refugees (UNRWA), with a third of that number living in refugee camps.
Living conditions in neighbouring Arab countries vary a great deal, with Lebanon - where Palestinian refugees are banned from working in most jobs or owning property - being the worst example.
Studies and surveys have indicated, however, that far from all refugees worldwide would want to go back to their land or that of their ancestors.
The minority of Palestinians who stayed on their land when Israel was created are now described as Israeli-Arabs.