Police fired tear gas as dozens of protesters set several motorbikes on fire.
"There has been sporadic shooting out there ... I can see people running," said a reporter of Iran's English-language Press TV who was at the demonstration.
From the beginning, the demonstration had been largely peaceful, but was disrupted by the shooting incident.
Robert Fisk, a writer and journalist who was observing the rally, told Al Jazeera he had heard shoots fired and seen demonstrators break out into a run, but that things had continued to be largely peaceful.
"It's extraordinary to me that anyone would start shooting at such a huge crowd of people," he said.
"Especially people who have been continuously non-violent all the way from the start of this march, which has of course been prohibited so I suppose that will be the excuse."
Many at the rally were supporters of Mir Hossein Mousavi, the election candidate defeated in Friday's polls by Mahmoud Ahmadinejad, the incumbent president.
Mousavi addressed the rally, his first public appearance since his election defeat.
But Fisk said not all the protesters were supporting Mousavi, many were simply making a statement about the vote.
"I don't think they [the demonstrators] are all supporting Mir Hossein Mousavi, they are objecting to the presence of Ahmadinejad as the president. They don't believe he won those votes," he told Al Jazeera.
The official results of the election gave Ahmadinejad 63 per cent of the vote and Mousavi just 34 per cent, figures Mousavi has dismissed as a "dangerous charade".
Alireza Ronhagi, Al Jazeera's correspondent in Tehran, said there had been an obvious police presence at the rally.
"There were several kinds of police there - riot police were easily distinguishable from the rest of them with their gear and vests and helmet," he said.
"There were normal police, with their green outfits. There were also plainclothes police who you could only recognise because they were carrying wireless communicators. And there were also others, who were just walking but looked like they didn't belong to the rally."
The results of Friday's election prompted a wave of street protests by Mousavi's supporters and Iran has faced a growing international backlash over the validity of the polls.
|There was an obvious police presence
at the rally [EPA]
Chris Saeedi, a journalist who witnessed the rally, called the protest a "cry for help" but said he had not seen any shooting.
"We want the vote to count. It is a blatant lie - it's an impossibility ... where ever you go in town this is a known thing that this [Ahmadinejad's election victory] is a fraud," he told Al Jazeera.
"It might be harder for people outside the country to see with the press blocked, but for people within the country 60 per cent is an impossibility."
Barack Obama, the US president, said on Monday that he was deeply troubled by the post-election violence.
Saying the world was inspired by Iranian demonstrators, he added that free speech and the democratic process must be respected.
France and Germany summoned the respective Iranian ambassadors to account for events.
Ahmadinejad delayed attending a regional security summit in Russia as a result of the protests.
Elsewhere, pro-Ahmadinejad protesters gathered outside both the British and French embassies in Tehran to protest against interference in Iranian affairs by foreign powers.
Some chanted slogans against the "plots of Iran's Western enemies", a witness said.
Mohammad Khatami, Iran's reformist former president, criticised the authorities for denying permission for the pro-Mousavi rally to be held and said the election had dented the trust of the public.
Ayatollah Ali Khamenei, Iran's supreme leader, has ordered officials to look into the election complaints.
The 12-man Guardian Council said it would rule within 10 days on the two official complaints it had received from Mousavi and Mohsen Rezaie, another losing candidate.
The council headed by Ayatollah Ahmad Jannati, who endorsed Ahmadinejad before the vote, vets election candidates and must formally approve the results for the outcome to stand.
Earlier in the day, about 400 pro-reform students, many wearing green face masks to conceal their identity, gathered at a mosque in Tehran University and demanded Ahmadinejad's resignation.
|Mousavi spoke at the protest, his first public appearance since his election defeat [AFP]
Some said a religious armed group had attacked their dormitory.
"They hit our friends and took away at least 100 students. We have no news about their whereabouts," said another student.
University officials denied the reported incident, but Iran's ISNA news agency later reported that MPs had called for an investigation into the attack.
Ebrahim Yazdi, the leader of the banned opposition Freedom Movement, said Ahmadinejad's attacks on his opponents had opened a "Pandora's box" which had led to a deep crisis within the Islamic state's establishment.
"The result of such a crisis now is that the rift among the ... personalities in the revolution is getting deeper," he said.
"It is also between people and their government ... a rift between state and the nation. It is the biggest crisis since the  revolution."