Protesters used wooden poles and hammers to bring down parts of a concrete wall outside the embassy complex, while onlookers chanted "People want the wall down," al-Masry al-Youm reported.
The wall was erected earlier this month after more than a week of protests to draw attention to the deaths of five police officers killed during a search for Palestinian militants on the border.
The demonstrators say they hope to pressure the ruling military council to end trials of civilians and set a time frame for handing power over to a civilian government, al-Masry al-Youm reported.
They are also calling for increased independence for the judiciary.
Protesters began gathering Thursday night to secure a spot at the place that served as the epicenter for the Jan. 25 uprising that ousted President Hosni Mubarak Feb. 11, Bikya Masr reported.
Demonstrations and marches were set to take place at additional locations in Cairo and elsewhere in Egypt, organizers said.
The Tahrir Square rally was the first major demonstration since the end of Ramadan.
Presidential hopeful Mohamed ElBaradei said Egyptians have a right to protest military rule because many promises of democracy have not been realized.
The former director general of the U.N. International Atomic Energy Agency and Nobel Peace laureate called on the Egyptian security services to protect Friday demonstrators.
The ruling military council, which took over after Mubarak resigned, said in a statement posted on its Facebook page it would allow peaceful protests. The Interior Ministry said police were removed from the square for 24 hours to allow the protests to proceed peacefully.
The military's 20-member ruling Supreme Council of the Armed Forces increased a military and police presence in the square 5 1/2 weeks ago after forcibly clearing a 3-week-old demonstration protesting the slow pace of change since the revolution.
On Aug. 1, hundreds of Egyptian troops and security police officers shredded tents, arrested dozens of protesters and sent about 200 others fleeing into nearby streets as the Ramadan holiday was to begin.
The military council initially said it would hand over legislative powers following a parliamentary election this month and transfer executive powers after a presidential election to be held by the end of the year.