In the run up to local elections on Sunday, witnesses have estimated that at least 20,000 people were on Madrid's main square, despite a law prohibiting political events on the eve of elections.
The ban, which came into effect at midnight, has been upheld by the supreme and constitutional courts.
"I'm protesting because I've got no job future in Spain even though I've finished my degree in tourism," said 25-year old Inma Moreno on Madrid's Puerta del Sol plaza.
"This should make the political classes aware that something is not right."
On Friday, some among the young protesters, dubbed "los indignados" ("the indignant"), told the Reuters news agency that they feared the police would forcibly disperse the demonstrators.
But the ruling Socialists, who face heavy losses on Sunday, signalled that police would not enforce the ban. "To resolve one problem the police shouldn't create another problem," interior minister Alfredo Perez Rubalcaba told reporters.
Prime minister Jose Luis Rodriguez Zapatero, who has failed to contain the highest unemployment in the European Union at 21.3 per cent, said he respected the protesters.
Analysts said that police action against the peaceful demonstrations would be disastrous for the Socialists.
The protesters have departed from years of patience over government austerity measures and a youth unemployment rate of about 45 per cent, making their voices heard before the polls.
They have called on people not to vote on Sunday for the two main parties, the Socialists and the centre-right opposition Popular Party. Spaniards elect 8,116 city councils and 13 out of 17 regional governments on Sunday.
Spain pulled out of recession at the start of last year, but the economy has failed to gain serious momentum and unemployment has spiralled higher.
The protests have resonated through Spaniards of all ages, including those who remember unrest which swept much of Europe more than 40 years ago.
"I saw the protests in May '68, and this is a similar movement, of the youth that had to come out on the streets," said Javier Gutierrez, an engineer accompanied by his wife who was making an early exit to get into work the next day.
But despite attracting huge media attention, analysts said the protests would not change the outcome of Sunday's elections, when voters will punish the Socialists over their handling of the economic crisis, according to a prominent pollster.