Masked militants marched in a procession to remember the man who led the Palestinians for 40 years.
Waving Palestinian flags, banners and pictures of Arafat, the crowd chanted pro-Arafat slogans.
A model of the Al Aqsa mosque in Jerusalem was built for the rally, as a representation of Palestinian aspirations to one day have control of the holy city.
The anniversary was also marked by Palestinians in East Jerusalem who held a candlelit vigil under the watch of Israeli security.
The focus of the official commemoration was Arafat's headquarters compound in the West Bank city of Ramallah, where he spent his final years isolated and encircled by the Israeli army.
Arafat died aged 75 on November 11, 2004 at a French military hospital in Paris, having failed to realise his dream of a Palestinian state.
Palestinians continue to speculate about the cause of his death.
A Palestinian ministerial inquiry proved inconclusive, but said it was not caused by germs, cancer, poisoning or HIV Aids.
His wife, Suha, refused to allow an autopsy.
Arafat, a former guerrilla leader who won a Nobel Peace Prize and the deep admiration of his people only to sink into renewed conflict with Israel, left a complicated legacy.
Shunned for years by the United States and Israel who considered him an obstacle to peace, his death stirred hope for a revival of the peace process.
Arafat's successor, Mahmoud Abbas, was elected in January on a platform of non-violence.
He quickly forged a ceasefire agreement between Palestinian militants and Israel that smoothed the way for Israel's withdrawal from the Gaza Strip in September after 38 years of occupation.
But flare-ups of fighting have dampened immediate prospects for a breakthrough.
Palestinian prime minister Ahmed Qurie said on Saturday that Israel was no longer a partner for peace, and sharply criticised its policies in annexed east Jerusalem.
"Israel has become a partner for permanent struggle, not a partner for potential peace in the foreseeable future," he told officials marking the Arafat anniversary in Ramallah.