Over 150 shanties were burnt down and several vehicles damaged by mobs that went berserk after local authorities tried to remove encroachments in the city's Sadar Bazar area.
The police said their men were also fired at from the rooftops.
Over two dozen cars and two-wheelers and eight or nine buses were damaged in the violence triggered by an attempt by the Cantonment Board and the police to remove encroachments in Bhusa Mandi.
Police said miscreants set some jhuggies on fire after they arrested four men.
People from the Hindu and the Muslim communities blamed each other for starting the fire, escalating tension in the area.
The police said the situation was later brought under control.
A magisterial inquiry has been ordered.
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