Iran's post-election political unrest claimed its first confirmed fatality yesterday when shots were fired at supporters of the defeated presidential candidate, Mir Hossein Mousavi, who had defied an official ban on a mass rally in central Tehran.

Basij militiamen loyal to the hardline incumbent, Mahmoud Ahmadinejad, were said to be responsible for the shooting, which took place as hundreds of thousands of pro-Mousavi demonstrators marched through the city centre to Azadi (Freedom) Square demanding the result of last Friday's election be annulled.

Photographs taken at the scene appeared to show one man dead and several others with bullet wounds.

Precise figures were not available, but some estimates suggested that more than 500,000 people were involved in the protest against the election "theft". Such large-scale protest has not seen in Iran since the 1979 Islamic revolution.

"Mousavi we support you! We will die but regain our votes," shouted supporters, many wearing the green of the moderate's election campaign and carrying signs with the message "Where is my vote?"

Several vehicles were set alight in Tehran's streets and there were reports that protesters had taken to city rooftops at nightfall, shouting "Death to the dictator". Last night protesters promised they would be back on the streets again today.

The presence of huge crowds on the streets – and reports of other fatalities – appeared to dash earlier predictions that the unrest of the past three days would fade away. There was also a fresh twist when it was announced that Iran's supreme leader, Ayatollah Ali Khamenei, had ordered the powerful guardian council to investigate claims of election fraud.

Diplomatic sources said this was not a major shift, suggesting that Khamenei had merely warned Mousavi that he should proceed with his fraud complaints carefully, using only "legal" means available to him. Khamenei, who stands at the apex of Iran's complex political system, endorsed the election result on Saturday, dashing opposition hopes that he might be persuaded to order a recount or even annul the result.

The guardian council, comprised of 12 senior clerics, said it would rule within 10 days on two official complaints it had received from Mousavi and Mohsen Rezaie, another election candidate. The council vets candidates and must formally approve results for the outcome to stand.

The interior ministry, which announced the election result on Saturday, and the president have rejected charges of fraud. Ahmadinejad compared protesters to football fans angry that their team had lost.

Questions were asked though how 40 million Iranian votes had been counted and the results announced so soon after the polls closed.

Observers were stunned by the size of the Tehran rally, in defiance of a ban. And there was no sign of the anger diminishing: "Many of my friends are in prison," said Saman Imani, a student beaten by police. "Iran is becoming a dictatorship. Ahmadinejad is denying the Holocaust because he's as brutal as Hitler was."

Ebrahim Yazdi, leader of the banned opposition Freedom Movement and a veteran of the revolution, warned that Ahmadinejad's attacks on his opponents had opened a "Pandora's box" which had led to a deep crisis within the regime.

"The result of such a crisis now is that the rift among the ... personalities of the revolution is getting deeper," he said. "It is also between people and their government ... a rift between state and the nation. It is the biggest crisis since the revolution."

Further reports tonight spoke of people in Isfahan, Ahwaz, Zahedan, Yazd and Mashhad shouting "Allahu Akbar [God is great]" in support of the Tehran demonstrations. Mohammad Khatami, the reformist ex-president and a backer of Mousavi, attacked the government for banning the rally.

Ahmadinejad delayed a visit to Russia but was due to arrive tomorrow.

Concerned governments around the globe were watching the situation closely. "The implications are not yet clear," said David Miliband, the foreign secretary.

The US president, Barack Obama, said he was "deeply troubled" by the post-election violence. "It is up to Iranians to make decisions about who Iran's leaders will be. We respect Iranian sovereignty and want to avoid the United States being the issue inside of Iran," he said, adding that Washington wanted to pursue a "tough, direct" dialogue with Tehran.