Thousands of defiant Hong Kong protesters stood their ground on Monday after facing tear gas and riot police in overnight clashes, paralysing parts of the city with their campaign to demand Beijing allow free elections.

In the worst unrest since the former British colony was handed back to China in 1997, demonstrators fought hours of running battles with police, choking on clouds of tear gas as officers attempted to control the seething crowds.

Throughout the morning thousands of people were refusing to budge from at least three major thoroughfares on Hong Kong's main island and across the harbour, with many schools and businesses shuttered as widespread disruption left many commuters struggling to get to work.

Exhausted protesters sheltered from the fierce sun under umbrellas, with some trying to snatch some sleep on the ground.

The demonstrators have stuck to their demands for full universal suffrage after Beijing last month said it would allow elections for the semi-autonomous city's next leader in 2017 but would vet the candidates -- a decision branded a "fake democracy".

Tensions dropped significantly after city authorities withdrew riot police as dawn broke.

"Because the citizens gathered on the streets have calmed, riot police have been withdrawn," a statement on the government website read, calling on protesters to do the same.

But demonstrators showed little sign of standing down.

"We are more confident now -- the police don't have enough officers to close down the districts where there are protests," Ivan Yeung, a 27-year-old who works in marketing, told AFP after a night camped out in the busy Causeway Bay shopping district.

- Dramatic escalation -

The clashes marked a dramatic escalation of protests in the city, which rarely sees such unrest, after a tense week of largely contained student-led demonstrations exploded into mass angry street protests.

Analysts said it was difficult to predict what might happen next.

"The difficulty is that there seems to be no going back for both sides," Surya Deva, a law professor at the City University of Hong Kong, told AFP. "Which side will blink first is difficult to say, but I think protestors will prevail in the long run."

Michael DeGolyer, a professor at Hong Kong Baptist University, said Hong Kong's thinly-stretched police force were getting weary.

"Their hope is that demonstrators will get tired and quit before the police get too worn out to continue. But tempers will start getting short by tomorrow or Wednesday," he said.

Students have boycotted classes in the past week, which also saw protesters storm Hong Kong's central government complex, with pro-democracy group Occupy Central on Sunday bringing forward a mass civil disobedience campaign that had been due to start on October 1.

Demonstrators have decried the police's use of tear gas -- the first in the city since protests at a World Trade Organization summit in 2005 -- but the authorities have defended their conduct, calling the ongoing protests unlawful.

In a statement the US consulate said it supported Hong Kong's "well established traditions... such as freedom of peaceful assembly, freedom of expression, and freedom of the press".

But it added it did not take sides or support any particular group.

Overnight, Hong Kong's leader Leung Chun-ying insisted demonstrators withdraw from the streets.

He also quashed rumours circulating on social media that city authorities planned to call in the Chinese military, which stations a garrison in the city.

"There is absolutely no proof of this," he said.

But the protest leadership showed little sign of backing down.

"Anyone with a conscience should be ashamed to be associated with a government that is so indifferent to public opinion," Occupy Central said in a statement Monday.

Protesters are demanding that Leung step down and that Beijing rescind its decision last month that anyone standing for election to the city's top post in 2017 must be vetted by a loyalist committee first.

- Commuters frustrated -

For commuters in the already densely populated and congested city, the ongoing protests brought widespread disruption.

More than 200 bus routes were cancelled or diverted as well as large sections of the city's tram networks. The underground railway was operational but exits at several subway stations in key areas were closed.

An AFP reporter saw angry confrontations between protestors and frustrated members of the public.

The city's stock exchange opened as usual, but sank nearly two percent by late morning as investors fretted about the potential impact the ongoing disruption could have on a key regional market.

A total of 41 people had been treated in hospital for injuries sustained during the protests, broadcaster RTHK reported.

Officers have so far made 78 arrests for offences ranging from forcible entry into government premises, unlawful assembly, disorderly conduct in public place and assaulting public officers.

Britain handed Hong Kong back to China in 1997 under a "one country, two systems" deal that guarantees liberties not seen on the mainland, including freedom of speech and the right to protest.

But tensions have been building in the southern Chinese city over fears that these freedoms are being eroded, as well as perceived political interference from Beijing.