The protesters, who were mostly high school and college students, vented anger over the shooting of an unarmed black teenager by a white policeman.
Nineteen-year-old Tony Robinson Jr was shot on Friday evening in an apartment. He was unarmed, but police say he attacked the officer who shot him.
A series of police shootings have stoked racial tensions in the US.
Students from all of the city's high schools walked out of classes to attend the peaceful rally inside the capitol building's rotunda, the Wisconsin State Journal reported.
Inside the building, they carried a "Black Lives Matter" banner and chanted "Justice for Tony!"
This latest demonstration marks the fourth day of protest since the shooting on Friday evening.
On Sunday, more than 100 people marched to the same building, beating drums and holding placards.
One of the chants that rang out on Sunday in Madison was: "The people united will never be defeated."
Officer Matt Kenny was responding to an emergency call about a man obstructing traffic who had allegedly been involved in an assault, when he confronted Robinson.
The officer followed the teenager to an apartment, and forced his way into the building after hearing a disturbance.
Madison Police Chief Mike Koval said the officer was struck on the head before shooting the unarmed man.
Robinson was declared dead at a hospital.
Mr Kenny has been placed on leave while the Wisconsin Department of Justice conducts an investigation.
"Folks are angry, resentful, mistrustful, disappointed, shocked, chagrined. I get that," Mr Koval said.
"People need to tell me squarely how upset they are with the Madison Police Department."
Court documents show that Robinson suffered from attention-deficit disorder and had a tendency to make impulsive and risky decisions.
The city's mayor, Paul Soglin, released a statement calling the shooting "a tragedy beyond description" and promised to be transparent in communicating the details of the investigation.
On the night of the shooting, Mr Koval attempted to meet with Robinson's family. His mother refused a meeting, but Mr Koval was able to meet and pray with Robinson's grandmother.
Mr Kenny has been a member of the Madison police force for 12 years. He was cleared of wrongdoing and commended for his actions during a 2007 shooting incident.