About 8,000 people have been displaced from their homes near a new oil well since the hot mud began to stream out of it in May.
One demonstrator, Mohammad Imron, who joined the protest in the town of Sidoarjo on Tuesday, said: "I saved money bit by bit to pay the mortgage and in 15 minutes the mud drowned my house."
Thousands more people in other villages surrounding the Banjar Panji-1 exploration well in Sidoarjo province are also threatened by the expanding mud.
Lapindo Brantas, the oil company that owns the well, has offered some compensation packages, but residents have dismissed these as unsatisfactory.
Syaiful Illah, Sidoarjo deputy governor, asked the crowd to give the local government more time to look into their demands for more compensation.
The scale of the disaster prompted a recent visit to affected areas by Susilo Bambang Yudhoyono, the president.
Earlier this month, Indonesia's environment minister said the mud could be treated and channeled into the sea, but warned that untreated mud could damage the environment.
The protesters said they would put the mud into the sea anyway.
Hari Purnomo, a rally organiser told protestors: "Do not fear being labelled as environment polluters. The mud keeps on pouring. So, if officials prioritise human safety over environment, throw the mud into the sea without treatment."
The mud has swamped land in four villages and contaminated many shrimp ponds.
Prior to the arrival of the mud, the area was famous, in Indonesia, for its shrimp crackers.