Rising nationalist sentiment may pose the biggest challenge to Vladimir Putin's hold on power as the Kremlin persists in avoiding a glaring social fracture, experts warn.

The Kremlin has so far refrained from dealing with mounting anger against people from Russia's turbulent North Caucasus region, as well as migrant workers from central Asia, which has grown as the country's oil-fuelled economic boom has given way to the hardship of the global financial crisis.

Xenophobic vitriol was all too palpable during a recent rally in which 7,000 nationalists, mainly young men and boys, donned black balaclavas or blue medical masks and took to the streets of Moscow chanting messages of hate and slogans in support of ethnic Russians. They ran from the conventional – "Russia for Russians" – to the bizarre – "Sport! Health! Nationalism!" – to the extreme – "Fuck the Jews". City authorities gave permission to hold the rally, a right regularly denied to the liberal opposition, albeit on the city's outskirts. Helicopters hovered overhead, and a relatively small contingent of police lined part of the rally's path.

"I came here because there's an occupation going on by people from the Caucasus," said Andrei Sharapov, a rosy-cheeked 14-year-old who attended the march with friends. "They steal, they're violent and we need to get rid of them in any way."

At least two non-Slavic men were attacked by nationalists in separate incidents after last week's march, according to Alexander Verkhovsky, director of the Sova Centre, a Russian NGO that monitors ethnic hatred.

Verkhovsky said it was impossible to count the number of nationalists, but put the number of those in nationalist groups at "roughly 20,000". Casual racism and antisemitism is markedly widespread.

"Of course the growth of the far-right is happening here," he said. "But it doesn't have a political platform like it does in Europe. If someone has far-right views in Europe, they vote for the corresponding party. There is no such party here."

That's not precisely true. The far-right LDPR, led by the nationalist firebrand Vladimir Zhirinovsky, has been represented in parliament since the fall of the Soviet Union. Yet it belongs to an older generation, and has been tainted by what is seen as its co-option by the Kremlin and the ruling United Russia party.

There have been other attempts to form nationalist parties, most notably Rodina (Motherland), once led by Dmitry Rogozin, a well-known nationalist who is now Moscow's envoy to Nato. It seemed the Kremlin was promoting a Rogozin comeback this year, inviting him to speak on nationalism at a policy forum in Yaroslavl which was chaired by the president, Dmitry Medvedev. The ambassador duly gave a speech decrying runaway migration from the Caucasus and the state of ethnic Russians.

Rogozin is supporting Putin and his United Russia party in the country's parliamentary elections on 4 December. But not all nationalists are so obliging. As common as racist slurs at the demonstrations were signs reading: "We demand a nationalist party in parliament" and "Down with the party of crooks and thieves", a slogan denouncing United Russia. The man who came up with the tag, the popular anti-corruption activist Alexey Navalny, brought some of his supporters to the rally, seeking to link his anti-Kremlin views with a force that could well be counted as Russia's largest opposition.

The Kremlin has adopted something of an "ad hoc approach" to nationalism – cracking down when necessary, closing its eyes when possible. As the number of racially-motivated killings soared, police stepped up their investigations. That has seen the number of murders drop – Sova registered at least 84 killings in 2009, down to 42 in 2010 and 20 so far this year.

"People have got scared [of murder charges]. But to beat someone up, or stab them, sometimes it can end in no investigation at all," he said.

The number of attacks has remained roughly the same, with 434 registered by Sova in 2009, 396 in 2010 and 111 so far this year.

Experts say nationalism has risen to feed the void in national ideology – communism fell in 1991 only to be replaced by today's cult of Putin.

Friday's rally was held to coincide with the Day of National Unity, a holiday Putin founded in 2005 to replace the commemoration of the Bolshevik Revolution. Yet according to the Levada Centre, a Russian pollster, 59% of Russians do not know what it stands for. And, argue analysts, neither do the country's leadership.

"Putin and Medvedev were away from Moscow on a day that is technically Russia's main holiday," said Masha Lipman, an analyst at the Carnegie Centre in Moscow. "They don't have a message. They don't know what to say."

"Putin is walking a tightrope. He is being evasive," she said. "Ahead of elections, he can't afford to antagonise Russian citizens, even if they are minorities. Nor can he say he's outraged by ethnic crime because this is bound to antagonise young constituencies in Russia."

"There is no good solution," she said. "It is a real, serious problem. And it will not go away – [nationalism] is by far the biggest theme that brings the Russian people together."