The Dresden region has recently been the scene of several violent anti-migrant protests organised by right-wing groups.
Chancellor Angela Merkel was booed when she visited a refugee centre in the nearby town of Heidenau last week.
The country expects up to 800,000 asylum applications this year - more than any other EU country.
Police said 1,000 people joined the protest, which was called by the Anti-Nazi Alliance, but organisers said the number was 5,000.
Dresden has become the hub of Germany's "anti-Islamisation" Pegida movement, which has brought thousands on to the streets for protests since October 2014.
Up to 25,000 joined protests at the start of the year.
Immigration has become a hot topic in Germany this year, amid a surge in the numbers of asylum seekers, fuelled by the wars in Syria and Iraq.
Demonstrators marched through the city chanting "Say it loud, say it clear, refugees are welcome here".
Agency reporters said refugees joined in with the rally at a shelter for asylum seekers.
Mrs Merkel has said there will be zero tolerance for "vile" anti-migrant violence.
A poll by public broadcaster ZDF has shown that public opinion is broadly behind her, with 60% of Germans saying that Europe's biggest economy was capable of hosting the increasing number of asylum-seekers.
As a place destroyed in the fight against fascism in World War Two, the modern city was one with core values of "openness to the world and tolerance" Dresden Mayor Helma Orosz said earlier this year.
A mass rally in support of refugees has passed off peacefully in the eastern German city of Dresden.