The city centre compound, dubbed the "Den of Spies" and covered in anti-US murals, was seized after the 1979 Islamic revolution toppled the Washington-backed Shah Mohammad Reza Pahlavi.
"These are unforgettable memories. The US embassy was a safe haven for the US and its allies who wanted to topple the revolution," said Mohammad Baqer Shariatpanah, a 58-year-old cleric who had joined those holding the hostages after the revolution.
"The Islamic values of the time are still alive and there is no doubt the US is still Iran's main enemy," said the cleric, who takes part in the rally every year.
Fifty-two Americans were held captive for 444 days - a drama which led to the severing of diplomatic ties in 1980 - and the anniversary of the take-over is marked every year by regime-organised events for young students invited to condemn the "Great Satan".
This year's demonstration saw thousands of teenage boys and girls, who have been given a day off school, gather outside the compound. Many were wearing camouflage vests and waving religious banners.
Despite the relaxed carnival atmosphere, one teacher insisted the event was more than just a holiday outing.
"They are fully aware of the importance of this day. They are fully aware of our legitimate right to nuclear technology," said Ismail Shajari, a 34-year-old west Tehran teacher who had come with 60 pupils.
"We students are proud to have given so many martyrs to the revolution. We are also proud that after 26 years of revolution we have reached the highest level of technology thanks to the expertise of our nuclear scientists," a declaration from the students said.
"Nuclear technology is our legitimate right. All Iranian officials must safeguard this technology and not give in to the ruling of the International Atomic Energy Agency (IAEA)," the statement said.
The rally also featured flag burning, effigies of US President George W. Bush, Israeli Prime Minister Ariel Sharon and British Prime Minister Tony Blair as well as banners reading "Bush go to hell!".