Uniting under the banner "Stop the hatred", counter-demonstrators said they wanted to drown out the march by the anti-immigration, anti-Islam Alternative for Germany (AfD).
But AfD members have accused some opponents of threatening to use violence.
Shortly after mid-day, around a thousand AfD supporters gathered at Berlin's main train station for the start of their march "for the future of Germany", which is set to end at the iconic Brandenburg Gate.
Many of them were waving Germany's black, red and gold flag or carrying blue balloons, the colour of the AfD. The march marks the first public show of strength by the nationalist outfit since it became the largest opposition party.
Scheduled to address the crowd are top AfD figures Jörg Meuthen and Alexander Gauland, who regularly rail against Chancellor Angela Merkel's decision to allow in large numbers of mostly Muslim refugees at the height of
Europe's migrant crisis.
"I came today because we can't go on like this with Merkel," said 47-year-old AfD member Christian Neubauer.
"It can't be that the government wastes all this money on refugees while our elderly people live in poverty."
After predicting 10,000 AfD supporters would show up, organisers later scaled back expectations to "at least 2,500 to 5,000".
Berlin AfD chief Georg Pazderski said ahead of the march that many still feared being "stigmatised" for showing their AfD colours, even after the party took nearly 13 percent of the vote and won its first seats in the national
parliament in last year's elections.
'Bass away the AfD'
In the heart of Berlin meanwhile, some 3,000 people began gathering for a slate of counter-demos, with organisers saying they intended to dwarf the far-right turnout.
"We won't leave the streets to the AfD," said Nora Berneis of the "Stop the hatred, stop the AfD" alliance, which includes political parties, unions, student bodies, migrant advocates and civil society organisations.
One of the most colourful counter-demos was organised by some 100 clubs from Berlin's legendary techno scene, who were using boats and floats on the river Spree and a convoy of DJ-carrying trucks to "bass away" the AfD.
"The Berlin club culture is everything that Nazis are not," they said in a statement. "We are progressive, queer, feminist, anti-racist, inclusive, colourful and we have unicorns."
More than 13,000 dance fans said they would attend, according to the event's Facebook page.
Although the vast majority of counter-demonstrators are expected to be peaceful, members of the far-left extremist Antifa movement have on their website called for "chaos", urging sympathisers "to sabotage the AfD rally
using all necessary means".
Berlin police have deployed 2,000 officers, drafted in from across Germany, to prevent clashes and any attempts "to block the right to free speech".
In a sign of the tensions, Greens lawmaker Renate Künast was flooded with hate messages when she posted a Facebook video urging people to join the anti-AfD demos — with some of the comments including rape threats and calls for her to kill herself.
Founded in 2013 as an anti-euro party, the AfD rose to prominence by capitalising on widespread anger over the
arrival of over a million asylum seekers in Germany since 2015.
It now holds more than 90 seats in the Bundestag where its presence has changed the tone of debate. Just this month, AfD co-leader Alice Weidel earned herself a formal rebuke from the parliamentary speaker for describing immigrants as "headscarf girls, welfare-claiming, knife-wielding men and other good-for-nothings".
Merkel's left-right coalition government has responded to the AfD's rise by tightening asylum policies, but the party continues to climb in opinion polls.