A 15,000-strong crowd carrying American flags and holding signs saying "Amnesty Now" paraded through the streets towards City Hall.
There are believed to be about 12 million illegal immigrants in the US.
Last year President George W Bush backed a Senate proposal on immigration that included a guest worker programme offering illegal workers a "path to citizenship".
But the plan has come to nothing amid opposition from Republican lawmakers in the House of Representatives.
'Don't have the money'
Correspondents say the latest proposals - leaked last week - are far more conservative. They have, campaigners say, left illegal workers disappointed.
"People are really upset," said Juan Jose Gutierrez of the LA-based Latino Movement USA.
"For years, the president spoke in no uncertain terms about supporting immigration reform... then this kind of plan comes out and people are so frustrated," he said.
According to the plan, a new visa category would be introduced for illegal workers, who could apply for renewable three-year work permits at a cost of $3,500 (£1,800), the Associated Press news agency reports.
But then to become legal residents, workers would have to return to their home countries, apply and pay a $10,000 (£5,100) fine.
Campaigners say the costs would be prohibitive for most illegal workers.
Maria Lopez, an illegal worker from Mexico, told AP that she would never be able to apply for residency under such a plan.
"We have no way to come up with that much money, and Bush knows that," she said. "He is doing this on purpose so we don't ever become legal residents."
Immigration is expected to be a key issue in the lead-up to next year's presidential election.