The tractors arrived in five convoys from across Spain, converging on the city centre and moving from Plaza Colon to the Ministry of Agriculture, bringing traffic to a standstill.
Protesters carried banners reading "No to our ruin" and "The Spanish countryside is not for sale".
Miguel Angel Aguilera, president of agricultural organisation Unaspi, warned the deal with the Mercosur bloc would affect all citizens.
"People will consume lower-quality products, we will lose food sovereignty, and there will be no competition," he said.
Madrid authorities reported 367 tractors and around 2,500 protesters took part in the demonstration.
Prime Minister Pedro Sánchez defended the agreement in parliament, calling it "extraordinary news" for Europe.
He promised compensation for affected farmers and safeguards to limit imports if domestic producers were harmed.
The long-delayed deal, signed last month, would create one of the world’s largest free-trade areas, boosting commerce between the 27-nation EU and the Mercosur bloc, which includes Brazil, Paraguay, Argentina and Uruguay.
The pact still requires approval from lawmakers in the European Parliament, which has referred it to the EU’s top court.
Farmers in Spain and other countries fear being undercut by a flood of cheaper goods from Brazil and its neighbours.
Major Mercosur exports to the EU include agricultural products and minerals, while the EU would export machinery, chemicals, and pharmaceuticals with lower tariffs.
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