Pakistan's most high-profile political killing in three years has bitterly divided the country, horrifying moderates but winning praise from religious scholars and lawyers who festooned the presumed killer in garlands.
Two senior police officers in Karachi said more than 20,000 protesters had joined the rally and more were arriving, while senior police official Irshad Sehar told AFP that more than 30,000 people were taking part.
Banners at the event included some supporting Taseer's presumed killer, police commando Malik Mumtaz Hussain Qadri, who has been praised by religious conservatives for shooting his boss outside an Islamabad coffee shop.
"Mumtaz Qadri is not a murderer, he is a hero," said one banner in the national Urdu language."We are ready to sacrifice our lives for the dignity of the Prophet Mohammad," read another.
Activists at the rally, which has been organised by conservative religious groups, called for "Jihad" or holy war.
The protest forced the closure of the city's main road and all markets in the teeming southern metropolis.
Controversy over the law flared when former information minister Sherry Rehman tabled a private member's bill in November, calling to end the death penalty for blasphemy, after a Christian mother-of-five was sentenced to hang.
Rights activists also say the law encourages Islamist extremism in a nation already beseiged by Taliban attacks.
Politicians and conservative clerics have been at loggerheads over whether President Asif Ali Zardari should pardon Asia Bibi, the Christian mother who was sentenced to death under the blasphemy law.
Pakistan has yet to execute anyone for blasphemy, but Bibi's case has exposed the deep faultlines in the conservative country
Bibi was arrested in June 2009 after Muslim women labourers refused to drink from a bowl of water she was asked to fetch while out working in the fields.
Days later, the women complained that she made derogatory remarks about the Prophet Mohammed. Bibi was set upon by a mob, arrested by police and sentenced on November 8.
Most of those convicted of blasphemy in Pakistan have their sentences overturned or commuted on appeal through the courts.
Rights activists and pressure groups say it is the first time that a woman had been sentenced to hang in Pakistan for blasphemy.
Only around three percent of Pakistan's population of 167 million are estimated to be non-Muslim.