Several hundred riot police surrounded the main Taksim Square -- where demonstrations have been banned since major anti-government protests in 2013 -- to prevent the "Trans Pride" event taking place during Ramadan.
It was the latest crackdown by police in Turkey against an event during the Muslim holy month.
As the police swooped in on the rally of about 150 people, the crowd fled into nearby streets.
The "Trans Pride" rally was to kick off LGBT (Lesbian, Gay, Bisexual and Transgender) week in Turkey.
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The demonstrators unfurled a rainbow flag, a symbol of the LGBT community, and then tried to read a statement but were prevented from doing so by the police.
Istanbul authorities said yesterday they had banned the annual gay pride parade set for June 26 to "safeguard security and public order" after a string of bombings around Turkey over the past year, some of them blamed on the Islamic State group, others claimed by Kurdish militants.
Earlier today, 11 anti-gay protesters, apparently Islamists, demonstrating near Taksim Square were arrested, according to the Dogan news agency.
"We are Ottomans," shouted one, according to video of the incident. "We don't want any of those people here."
A group of ultra-nationalists asked the authorities last week to cancel the gay pride parade, saying it would make sure it did not take place if police did not heed the call.
The annual Istanbul parade has taken place for the last 12 years without incident with thousands of people taking part in the most important LGBT gathering in a Muslim country in the region.