Five people were arrested in minor scuffles with religious hardliners outside the gay pride event, which had been shifted to the Hebrew University sports stadium in the face of security concerns, police said on Friday.
Elena Canetti, a gay rights activist, said: "The Holy City belongs to everyone.
"Why in Jerusalem? Because this is my city, Israel's capital and because everyone's rights, whatever their sexual, religious or national tendencies are, should be respected."
Organisers said the turnout at the Givat Ram campus stadium in Jerusalem was a round 4,000.
"According to our Bible, these people deserve the death penalty and we won't let them desecrate the holiness of the land of Israel"
Michael Pollack, a Jewish activist
Tel Aviv rallies usually attract tens-of-thousands for gay pride events.
A large "love without frontiers" banner and the rainbow-coloured gay flag decorated the central stage.
"Jerusalem - Free and proud!" said placards brandished by the crowd.
The plans also came in for criticism from the Vatican which warned of the offence likely to be caused to the sensitivities of Christians, Jews and Muslims alike by the event going ahead in the Holy City.
Ultra-Orthodox Jewish activists who had spearheaded the campaign against the march with almost nightly protests in religious neighbourhoods proclaimed victory in their fight against the event.
Yaron Pollack, 29, a book vendor in the ultra-Orthodox neighbourhood of Mea Shearim, said: "It's been a difficult week, every night there were fights.
"But it was worth it because we kept them off the streets. This is Jerusalem. This is the Holy City."
Israeli drag-queen Talula Bonet
Michael Pollack, 26, a Jewish activist, said: "They have problems. They are sick people and they should not show their sickness in public.
"According to our Bible, these people deserve the death penalty and we won't let them desecrate the holiness of the land of Israel."