Well over 100,000 people were participating in the parade, police said, while Israeli media put the number at 180,000. The event also drew thousands of people from around the world.
Large sections of Tel Aviv were shut for traffic and loud music blasted along the parade's route. Streets were packed thick with people waving rainbow flags and dancing. The theme of this year's parade, which was the city's biggest ever, was "Tel Aviv loves all genders."
Among the visitors was Conchita Wurst, the bearded Austrian cross-dresser who won last year's Eurovision song contest.
"There are just beautiful people here," Wurst told Israel's Channel 2 TV.
Rafael Anibal from Madrid said it was an "amazing party."
"I have been to many gay pride parades around the world and this is one of the best," he added.
A man dressed in a big white bow tie and sleeveless vest, who gave his name as Matteo Zakari, visited from Poland. He said "the people are amazing, the weather is amazing, I love Tel Aviv. The music is some of the best in the world."
Israel has emerged as one of the world's most gay-friendly travel destinations in recent years, in sharp contrast to the rest of the Middle East where gay culture is not tolerated and gays are persecuted and even killed.
Across the rest of the Mideast, gay and lesbian relationships are mostly taboo. The pervasiveness of religion in everyday life, along with strict cultural norms, plays a major factor in that. Same-sex relations are punishable by death in Iran, Mauritania, Saudi Arabia, Sudan and Yemen.
Gays serve openly in Israel's military and parliament, and many popular artists and entertainers are gay. However, leaders of the gay community say Israel still has far to go in promoting equality.
There is no gay marriage in Israel officially, primarily because there is no civil marriage of any kind. All Jewish weddings must be conducted through the Jewish rabbinate, which considers homosexuality a sin and a violation of Jewish law. But the state recognizes same-sex couples who marry abroad.
Among most Palestinians, gays tend to be secretive about their social lives and some have crossed into Israel to live safely. In the West Bank, a 1951 Jordanian law banning homosexual acts remains in effect, as does a ban in Gaza passed by British authorities in 1936.