(yards) from the palace, prompting police to fire the tear gas before retreating, allowing demonstrators to reach the palace walls, AFP correspondents said.
Morsi himself was not in the palace, a presidential source told AFP.
Protesters surrounded the palace on at least three sides. The demonstrators, many from liberal and leftist political movements, banged on lamp posts as others chanted "leave" in a thunderous show of force.
Marchers poured into the streets lining the palace in the upscale neighbourhood of Heliopolis, with riot police only able to guard entrances.
Tuesday's protest is the latest in a string of action opposed to Morsi's decree which expanded his powers and enabled him to rush through a draft constitution contested by liberals, leftists and Christians.
The demonstrators waved Egyptian flags, chanting for the downfall of the regime and denouncing the Muslim Brotherhood, from which Morsi emerged, for having "sold the revolution" that toppled Hosni Mubarak last year.
A November 22 decree issued by Morsi expanding his powers and enabling him to put to a mid-December referendum a draft constitution -- rejected by liberals, leftists and Christians -- has sparked strikes and deadly protests.
The charter has become the focal point of a political and ideological battle in Egypt between Islamists and the largely secular-leaning opposition.
"Egypt is a country where all religions should live together. I love God's law and Sharia (Islamic law) but I will vote against the constitution because it has split the people," said Bassam Ali Mohammed, a professor of Islamic law, as he neared the presidential palace.
Thousands also gathered in Cairo's Tahrir Square -- where protesters have been camping out since Morsi issued his decree.
Morsi's decree not only placed his decisions beyond judicial oversight but also barred any judicial body from dissolving the Islamist-dominated panel that drafted and approved the new constitution, sparking a conflict with the country's judges.
Security measures were tightened around the capital, with some schools and businesses closing on Tuesday.
Independent and opposition newspapers refused to publish Tuesday editions in protest at a lack of press freedom in the constitution. The move was in order to "stand up to tyranny," independent daily Al-Tahrir said on its website.
As he faces his worst crisis since taking office in June, Morsi insists the measures are aimed at ending a tumultuous transition following the popular uprising that toppled Mubarak in early 2011.
But his opponents have accused him of choosing the same path of autocracy that finally cost Mubarak his presidency.
The decision to go to a referendum on December 15 caused further upheaval, including within the judiciary itself.
On Monday, the Supreme Judicial Council said it would ensure judicial supervision of the referendum, despite calls for a boycott by some of their colleagues including the influential Judges Club, an association that represents judges nationwide.
On Tuesday, the head of the Judges Club, Ahmed al-Zind, stuck by his group's decision to boycott the vote and said judges who supervise the referendum "would never be forgiven."
The constitution itself has been criticised for failing to protect key rights and for paving the way to a strict interpretation of Islamic laW.