Polls opened at 7:00am (1200 GMT) and are set to close 12 hours later.
It is also the final contested Democratic nomination before February 5, known as "Super Tuesday", when over 20 states vote for a candidate which could be decisive for this year's presidential candidate.
Expectations are high for Obama, who needs a victory after Clinton won the Nevada caucuses and New Hampshire primary.
Polls on Friday showed Obama leaeding in South Carolina with 38 per cent, followed by Clinton with 30 per cent and John Edwards with 19 per cent.
As he aims to become the first black president in US history, Obama has built a powerbase among African American voters.
All candidates have taken care to court the state's black voters, who will prove crucial at the polls on Saturday.
Blacks make up about 50 per cent of the Democratic electorate in South Carolina.
The issue of race has proved controversial in the campaign, however, and both the Clinton and Obama camps have been keen to distance themselves from claims that voters could be split along racial lines.
"It is not whether you are black or white or rich or poor, but that we are addressing the issues that matter," Rick Wade, a senior adviser for the Obama campaign, said.
Edwards, who has yet to win a primary or caucus but has gained in recent polls in the state, rebuked both sides, saying their battles were detracting from the main issues.
"The candidates need to understand that this is not a personal battle between them, it's about what we should be doing for you [the voter]," he told NBC.
An emphatic win for any of the candidates would give them strong momentum in the lead up to Super Tuesday.
On Friday, Dennis Kucinich, an Ohio congressman, dropped out of the Democrat presidential race, saying he wished to focus on his congressional re-election campaign.
Republican battle looms
Meanwhile, the next Republican battle for the presidential nomination is set for Tuesday in the southern state of Florida.
Recent polls have placed John McCain, the Arizona senator, and Mitt Romney, the former Massachusetts governor, in a close race for the state, with Rudy Giuliani, the former New York City mayor, trailing in third place, and Mike Huckabee, former governor of Arkansas, behind him.
McCain was also endorsed as the preferred Republican presidential candidate by the New York Times newspaper.
A defeat in the Florida race would spell disaster for Giuliani, who has staked his presidential campaign on capturing the state and who has campaigned there constantly in the past two weeks.