An activist has been arrested for picking up a flare as thousands of angry federal budget protesters brought Sydney's CBD to a standstill.

The man, aged in his 20s, was forcefully bundled to the ground by police and put in handcuffs as thousands of protesters marched from inner city Ultimo to Town Hall on Wednesday afternoon.

The man picked up a lit orange flare off the ground and held it aloft before being swarmed by about six police officers, who pushed him against a wall and handcuffed him.

Hundreds of angry protesters surrounded the group and chanted "let him go, let him go" before mounted police moved in and dispersed the crowd.