Thousands gathered for a second day of protests on Sunday to demand the resignation of Prime Minister Najib Razak over a multi-million-dollar financial scandal, their spirits lifted by unexpected support from Malaysia's longest-serving leader.

Hundreds slept out overnight in central Kuala Lumpur after the first day of a rally that has brought into the streets a political crisis triggered by reports of a mysterious transfer worth more than $600 million into an account under Najib's name.

Najib, who denies wrongdoing, has weathered the storm and analysts say the two-day rally is unlikely to inspire broad public support for him to quit because it lacks a strong leader.

Security remained tight and anti-riot trucks stood ready. The first day passed without reports of violence and the rally resumed in a festive mood on Sunday with group exercises, a mass at the city cathedral and interfaith prayers.

City authorities rejected an application by pro-democracy organization Bersih for a protest permit, raising fears of a repeat of a 2012 rally when police used water cannon and teargas to disperse protesters.

The government blocked access to Bersih's website and banned the wearing of its signature yellow T-shirts, although the crowd of protesters was a sea of yellow.

The protesters, whose numbers swelled into the tens of thousands on Saturday, were thrilled when former leader Mahathir Mohamad made a surprise appearance.

Bersih said the open support from Mahathir, a deeply respected 90-year-old who was once Najib's patron and is now his fiercest critic, could add momentum to its movement.

"It's a boost for us that he recognizes that corruption is not good for the economy. It's a show of support for Bersih," said the group's leader, Maria Chin Abdullah.

Unlike the 2012 rally, this summer's protest lacks the support of a party identified with the Malay majority: most of the protesters on Saturday were from the minority ethnic Chinese and Indian communities.

However, Mahathir was long a leader of the powerful United Malays National Organisation (UMNO), which represents Malays.

OUTRAGE OVER MURKY MONEY

Bersih, whose name means 'clean' in Malay, campaigns for electoral reforms to ensure free and fair elections but its rally has been overtaken by outrage with the prime minister.

Malaysia has been gripped since July by reports that investigators probing allegations of mismanagement and corruption at the debt-laden state fund 1Malaysia Development Berhad had discovered the transfer into Najib's account.

Its anti-corruption agency has said the funds were a donation from an unidentified Middle East donor.

Najib, who says he did not take any money for personal gain, has sacked his deputy and ministers who had questioned him as he sought to contain the scandal. The attorney-general who had been investigating 1MDB was also replaced.

Authorities also suspended two newspapers and blocked access to a website that had reported extensively on 1MDB.

Najib also retains significant support from the long-ruling Barisan Nasional coalition and his party, UMNO. The coalition, in power since 1957, lost the popular vote for the first time in 2013 to an opposition alliance that split earlier this year.

However, he is under pressure over his handling of the economy, which has been hit by a slump in energy prices that threaten oil and gas revenues, and Malaysia's currency has plummeted this month to 17-year lows against the dollar.