More than 100,000 foreign troops are battling a resurgent Taliban in Afghanistan, where violence this year reached its highest level since the group was ousted by US-backed Afghan forces in 2001.
Thick plumes of smoke rose above the crowd as protesters set fire to a large effigy of what they said was Barack Obama, the US president.
"Death to America. Down with Israel," chanted one man at the rally, which was organised mainly by university students.
Others threw stones and clashed with police but no casualties were reported.
One banner carried by protesters said: "No to democracy. We just want Islam."
Captain Elizabeth Mathias, a media officer for US and Nato-led forces in Afghanistan, said the Taliban was trying to undermine foreign troops by spreading the rumour.
"We did not burn a Quran ... It is unfortunate that the protesters believe a Taliban rumour," Mathias said, adding an investigation had been carried out.
The Taliban could not be reached immediately for comment.