Authorities clamped an indefinite curfew on the temple town of Ujjain in Madhya Pradesh after clashes between Hindus and Muslims, police said on Sunday.
Officials said two people received injuries in the clashes late on Saturday night. Witnesses put the number at more than 50.
Saturday's clashes began after authorities demolished a row of shops near a mosque, angering Muslims, to widen a road ahead of a Hindu fair held every 12 years.
Inspector General of Police Sarabjeet Singh told Reuters the curfew was imposed in Ujjain town, 350 kms from state capital Bhopal, to prevent a major flare-up.
The situation was tense but fully under control, with police deployed in all sensitive areas, he said.
One officer said police tried to disperse protestors near the mosque by using water cannons, batons and tear gas.
"Suddenly, Hindus and Muslims started pelting stones at each other," the officer told Reuters over the phone from Ujjain, adding that municipal authorities had demolished the shops as they were illegally constructed on government land.
On December 6, 1992, Hindu zealots destroyed the 16th century Babri mosque in the northern town of Ayodhya, triggering riots that killed more than 3,000 people. The row has symbolised Hindu-Muslim tension since, and sometimes exploded in violence.
Muslims make up 12 percent of India's billion-plus population.