North Korea had threatened to retaliate if the balloons floated across the border, Voice of America reported.
The protesters, comprised of North Korean defectors and visitors from the United States, had planned to release 200,000 of the balloons from a peace park about 4 miles south of the DMZ.
Instead, the demonstration was brief, with participants unfurling banners and chanting "Liberate North Korean compatriots."
Suzanne Scholte, chairwoman of the North Korea Freedom Committee, was disappointed the release was stopped, saying North Korea's reaction to the planned launch shows "how very powerful and effective [the balloon releases] are."
"And the crazy reaction by [North Korean leader] Kim Jong Un just clearly indicates how weak he is in his hold on power," she added.
Some local residents opposed the launch, fearing the North would make good on it threat to shell villages in the area.
Police stopped a similar release last month.