Organisers said that 100,000 people have turned up at the commemoration event.
"The situation is quite tense. Fatah promised everyone a show of force and presence in Gaza and a show of force they certainly did show," Nour Odeh, Al Jazeera's correspondent in Gaza City, reported.
"[The rally] has surpassed all expectations [of the number of people attending]," she said.
Hamas set up checkpoints on the main north-south road in Gaza to check vehicles going to the event, residents said.
Their security forces also deployed across Gaza City and fired in the air at one intersection after youths threw stones at them, witnesses said.
Odeh said that she had spoken to people who had walked to the rally from Beit Hanoun, which lies at the northernmost tip of the Gaza Strip.
"Four months after the Hamas takeover of Gaza, the occasion of the anniversary of Yasser Arafat's passing has basically brought all Fatah members together to show that they are here," she said.
She said that the rally had galvanised Fatah suppoorters after previous attempts to hold public demonstrations in the Gaza Strip were put down by Hamas's police force.
The Wafa news agecny, which is run by the office of Mahmoud Abbas, the leaderof Fatah and the Palestinian president, said Hamas had confiscated pictures of Arafat and headdresses symbolising the late leader.
The items were seized "at a time when the Gaza Strip is being deprived of basic goods and medicine," a Hamas security offical was quoted as saying by a pro-Hamas web site.
Israel recently imposed caps on fuel imports to the Gaza Strip, leading to transport restrictions and reductions in electricity output to the Palestinian territory.