The Land of Israel Faithful, a far-right Israeli settler group which was involved in the demonstration, announced it would set up several new outposts throughout the West Bank.
The demonstration comes three days before an Israeli and Palestinian steering committee is due to convene to oversee peace negotiations that were relaunched in the US in November.
Before last month's conference in Annapolis, Maryland, Ehud Olmert, Israel's prime minister, pledged to dismantle settlement expansion.
More than 100 settlements already cover the occupied West Bank and are illegal under international law.
Baruch Marzel, an activist at the demonstration, told Al Jazeera's David Chater that the demonstrators would not observe any pledge by Olmert to dismantle settlements in the West Bank.
"Olmert and Abu Mazen [Palestinian president Mahmoud Abbas] aren't relevant. They can't do anything, not for good or bad," he said.
"Today [Abbas] is collaborating, tomorrow he'll help Hamas and become an enemy. Olmert is so weak that he isn't able to move one outpost.
"After 35 years of building settlements, I can tell you that here - where we have built a very large Jewish neighbourhood - it will prevent a Palestinian state."
Arieh Itzhaki, one of the event's organisers, said that the E1 corridor, which runs from Jerusalem to Maale Adumim through the occupied West Bank, should be retained by Israel.
"If E1 falls into Palestinian hands it will be dangerous for the future of the state of Israel," he said.
The Palestinians have said that if Israel begins construction in the mostly uninhabited E1 area and forms a link from Jerusalem to Maale Adumim, it would effectively split the West Bank in half.
If such contiguity along the corridor were to be established by Israel, the West Bank would be separated from east Jerusalem, which the PLO seeks as the capital of a future Palestinian state.
Yariv Oppenheimer, the head of Peace Now, Israel's anti-settlement group, said: "The settlers wish to isolate Jerusalem from the rest of the West Bank and prevent Palestinians living in the north of the territory from travelling south in order to bury the vision of two states for two peoples."