Under a sea of Palestinian flags the descendents of Palestinians who remained in Israel after its creation in 1948 chanted "We are not terrorists" and "We are stronger than the ban".

Israel banned the Islamic Movement's northern wing on November 17 accusing it of having instigated violence at a sensitive Jerusalem holy site that sparked weeks of Palestinian unrest.

At Saturday's protest in Umm al-Fahm about 60 kilometres (37 miles) north of Tel Aviv its leader denounced what he called Israeli "terrorism" in an address to the crowd in Umm al-Fahm.

"Who are the terrorists? This is racism by Israel which closed the associations that were helping 23000 orphans now left to go hungry" said Raed Salah.

"You outlawed the Islamic Movement to scare us but today it is the Palestinian people who are courageously saying 'No' to Israel's racism."

Since it was founded in the early 1970s the Islamic Movement has developed a network of religious sports and educational associations a model that spread across the Arab world.

Today Salah said these associations provide services to half a million Arab Israelis from a population of 1.4 million or 17.5 percent of Israel's.

The movement says that these are the services that Israel should provide.

Salah was recently sentenced to 11 months in prison for having called in 2007 "every Arab and Muslim to help the Palestinians and to launch an Islamic intifada" at the Temple Mount sacred to Muslims and Jews.

Israel says the movement's northern branch has stoked a wave of violence since October 1 that left dead 99 Palestinians and 17 on the Israeli side as well as an American and an Ethiopian according to an AFP tally.

Prime Minister Benjamin Netanyahu's government accuses it of inciting Arab Israelis and Palestinians to carry out violence spreading lies about the Temple Mount.

"Any person who belongs to this organisation or who provides services to it or who acts within its framework is henceforth committing a criminal offence punishable by a prison sentence" his government said.