The annual event in the county, organised by the Tyrone Volunteers Commemoration, this year coincided with the 40th anniversary of the deaths of two local IRA men.
Seamus Harvey and Gerard McGlynn died when the car bomb they were transporting to Castlederg detonated early, exploding in Co Donegal.
Sinn Féin MLA Gerry Kelly was a keynote speaker at the event, which his party supported.
He told UTV that he was there to pay tribute to IRA members from the area who had been "killed in action during the latest phase of a very old conflict with Britain."
"I was part of the IRA - I am very straightforward about that. I am proud to be here."
Unionist parties and the SDLP opposed the parade.
Senior DUP officials, including Gregory Campbell and Arlene Foster, joined hundreds of protestors at the town's cenotaph.
Demonstrators were separated by a line of police officers from the republican march.
If this generation, as leaders and parents, doesn't start showing more respect, tolerance and sensitivity toward others from a different tradition why should we expect our children to teach that to their children?
Peter Osborne, the Parades Commission chairman
Mr Campbell, the DUP's MP for East Londonderry, said the parade had re-traumatised the families of local victims of the IRA.
He said that the terrorist grouping had acted in grievous error in the past.
"They ought to have matured beyond that. They should be showing sorrow and remorse for what they've done - not glorifying in it."
One loyalist victims' campaigner, David Kerrigan, said: "There is no use talking to them, they have set relations back in this town 20 years."
Both sides had appealed for calm ahead of the commemoration.
Organisers of the event had been told by the Parades Commission that it would not be allowed to proceed around The Diamond area of the town and that no paramilitary trappings would be permitted.
However, TUV leader Jim Allister said "paramilitary berets, uniforms and banners displaying armalites were all on display".
"The immediate questions which arise are why did the PSNI permit such and what will they and the Commission now do about these flagrant breaches by Sinn Fein/ IRA?" He asked.
In a statement Peter Osborne, the Parades Commission chairman, welcomed the fact that the event passed off "peaceably".
"It is clear that there are some who while wanting to avail of their rights under the law feel that they are not bound by their responsibilities to adhere to the law.
"Belfast and Derry/Londonderry stand in marked contrast to each other. Castlederg, even with its particular sensitivities and issues, passed off peaceably," he added.
"Violence is never inevitable and the responsibility for any violence rests firmly and squarely with those who organise it and who perpetrate it," he added.
Secretary of State Theresa Villiers had urged the organisers of the parade to call it off.
But Sinn Féin West Tyrone MLA Barry McElduff said the party believes "that there can be no hierarchy of victims and that we all should have the opportunity to remember our dead."