The march began with Pedro Ross, the head of the Cuban labour movement, shouting "Socialism or death! Fatherland or death! We will be victorious!"
Loudspeakers blared patriotic music as marchers in rows 50 to 60 across filed past Castro, who watched from a reviewing platform at the Plaza of the Revolution but did not speak.
The rally served as a protest against the Helms-Burton Act, enacted last month by US politicians to strangle foreign investment in Cuba. The Bill was passed after Cuba shot down two aircraft from a Florida-based anti-Castro group that had violated Cuban air-space.
The law appears to have made some businesses reconsider investments in Cuba, but has also rallied international support for Cuba from nearly all US allies, who consider the law a violation of its sovereignty.
As if to demonstrate his defiance of the newly tightened US sanctions, Mr Castro earlier declared that Cuban socialism is stronger than ever.
"We are so satisfied to be called internationalists, to be called socialists, to be called communists," Mr Castro said in a three-hour speech, closing aCommunist Party meeting.
The speech set the stage for yesterday's march, the first major May Day celebration on the island for three years. It was meant to provide evidence of renewed confidence as Cuba recovers from an economic crisis caused by the collapse of its socialist allies in Europe.
Cuban exiles from Florida had planned to send a flotilla of up to 25 boats to the edges of Cuba's territory, but with predictions of rough weather only three boats left Key West.