The victory parade started at Jubilee Square in the city with the team later taking to the stage at Victoria Park.
Leicester manager Claudio Ranieri said it was "unbelievable" the whole city had seemingly turned up to celebrate.
Rock band Kasabian, who formed in Leicester in 1997, also performed for the crowd in the park.
Ranieri added: "I think this [the crowd] is because the team won but also they played with the heart, with the soul and I think the people understand this."
He later cried "keep dreaming, don't wake up", during an on-stage interview to thunderous roars from the approving crowd.
The champions were 5,000-1 to win the title at the start of the season.
But the Foxes overcame any doubters when they were presented with the trophy after their final home game of the season against Everton on 7 May.
Highlights of the club's season, including goals from striker Jamie Vardy and PFA Player of the Year Riyad Mahrez, as well as memorable quotes from Ranieri, were played on the park's big screens during the evening's celebrations.
Dave Wade, BBC News Online
Cancel Glastonbury. We've already had this summer's best festival.
Victoria Park was a sea of blue and white as almost a quarter of a million people came out to see the fantastic Foxes parade their trophy.
"A once in a lifetime experience" was how people described it to me again and again.
"It's absolutely fantastic - I wouldn't have missed this for the world," said Laura Day, there with her family and two young boys.
Gulab Mistry said: "It's been a brilliant day - we'll never see anything like this ever again."
The thing that struck me most was just how joyous the atmosphere was - everyone was out for a good time.
Flags waved furiously and the crowd noise rose to deafening levels as the team arrived on stage.
As Vardy's 11 goals in 11 straight games were replayed on the big screen the cheers were as big as when they were actually scored.
And then - surprise. Kasabian.
Fittingly, the band who have stuck close to their Leicester roots, started their set, saying: "This one is for the underdogs."
I'll leave the last words to Lee Jobber, a man who's famous for drumming at the King Power, who summed it up better than I could.
"I'm struggling to hold back the tears," he said. "If this doesn't pull the city together, nothing will."
Earlier, there was travel disruption across the city, with all park and ride sites shut and road closures brought forward early.
Hundreds of train commuters were also seen queuing in the Leicestershire village of Narborough, with CrossCountry forced to apologise due to the "extremely busy" network.
The city council had warned people to expect disruption and to travel in advance of the parade.
Leicester became champions of England for the first time in their 132-year history on 2 May when Tottenham failed to beat Chelsea.

Having survived a tight lbw appeal early on, the former England captain went on to reach three figures off 202 balls with 16 fours.
The Essex opener shared a 134-run second-wicket stand with Tom Westley but fell for 110 as he pulled a short ball from Dean Elgar to James Hildreth.
But, Westley's unbeaten 86 ensured the visitors chased down 255 in 84.1 overs.
In his first competitive match since stepping down as skipper of the national side, Cook rarely looked troubled while at the crease.
Resuming overnight unbeaten on four, Cook signalled his intent by hitting two boundaries from the first over of the day before Craig Overton was convinced the England batsman had been trapped lbw only for umpire Graham Lloyd to remain unmoved.
Despite 30 wickets falling in the first two days, the hosts' bowlers struggled and Nick Browne shared an 82-run opening partnership with the England opener before being caught behind off Jamie Overton for 35.
Cook batted on unfazed, as new Somerset captain Tom Abell ran out of options, and left the visitors requiring just 39 runs to win when he was dismissed.
A rejuvenated Westley, who made just 10 in the first innings, saw Essex home as he drove seamer Lewis Gregory to the boundary.
More than 240,000 people lined the streets to watch Leicester City parade on open-top buses in celebration of their Premier League title win.
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Alastair Cook's masterful century guided Essex to an eight-wicket victory over Somerset at Taunton.