Analysts say the government may end up bowing to public pressure and softening the planned cuts in a bid to preserve popularity for its shaky parliamentary majority, even though elections are not scheduled until late 2012.
The demonstration by some 20,000 people was the first serious test of the six-month-old centrist government's determination to force through austerity measures, required to secure international aid for the recession-hit economy.
"We want the government to fall or they will destroy us," said Maria Vasile, a 42-year-old teacher carrying a whistle who was urging people to join the protest. "It's either us or them."
International Monetary Fund-led aid packages across recession-hit emerging Europe have hit state workers and pensioners and the protest in Romania, the second poorest European Union state, raises the spectre of debt-wracked Greece.
Romania's €20 billion IMF-led bailout package is crucial for the government's ability to finance its ballooning budget deficit, an issue highlighted by two failed debt auctions earlier this month when investors feared the government backtrack in the face of mounting social pressure.
It has promised cuts to state wages of 25 per cent and to pensions of 15 per cent as part of an effort to secure the release of the next tranche of loans.
Neighbouring Bulgaria, the EU's poorest member, is also trying to impose public spending cuts of about 20 per cent to fill a revenue gap and keep its budget deficit under control.
Police said 18,000-20,000 demonstrators had assembled by midmorning, shouting: "Down with the government", making the protest outside government headquarters one of Romania's biggest since mass protests forced Communist dictator Nicolae Ceausecu to flee.
Union leaders called for a general strike.
Romania's state sector, criticised for inefficiency and corruption, employs one-third of the working population and pensions, wages and other social benefits account for two-thirds of budget revenues.
Such spending has become increasingly hard to finance after triple-digit pay rises in the booming 2005-2009 period, as the private sector faces shrinking domestic demand and higher unemployment.
The IMF has said it will disburse its next tranche of aid only after Romania enforces a credible plan to reduce its budget deficit to 6.8 per cent of gross domestic product.
It was 7.2 per cent in 2009 and the IMF says that without cuts it could reach 9 per cent of GDP.
Reuters