Thousands of people rampaged through Kathmandu, setting fire to a mosque and Arab targets and ransacking employment agencies after 12 Nepalese hostages were murdered in Iraq.
Two men were shot and slightly wounded by security guards when they tried to storm the Egyptian embassy, which represents Iraqi interests in the Himalayan kingdom, police and a doctor said.
The streets returned to normal after the government clamped an indefinite curfew and declared a national day of mourning Thursday for the victims of the worst hostage massacre in Iraq since the US-led invasion.
Demonstrators, some chanting "Punish the Muslims!", swept through Kathmandu early Wednesday, throwing stones and ransacking any targets with Arabic-language script.
Protesters climbed on top of and set fire to the Jama Masjid mosque, the largest shrine of the city's small Muslim minority, after pulling out its furniture and electrical equipment for a sidewalk bonfire.
Riot police used batons to push the crowd of some 5,000 people out of a sensitive central area which includes King Gyanendra's Narayanhity Palace, a police officer said.
The mosque suffered only minor damage but many of its contents were destroyed.
The protests erupted late Tuesday after news that the 12, who left the impoverished nation in search of jobs, were murdered by militants who abducted them about 10 days ago.
The kidnappers accused them of cooperating with US forces.
A mob made up mainly of youths broke windows of more than a dozen employment agencies blamed for sending Nepalese to Iraq and set fire to their vehicles, furniture and computers, police said.
An employee at Qatar Airways, one of the main airlines used by Nepalese seeking jobs in the Middle East, said dozens of angry people stormed into their premises and smashed furniture before setting the building on fire.
The employee estimated damage in the tens of thousands of dollars.
Many protesters also demanded the resignation of Prime Minister Sher Bahadur Deuba, saying he should take responsibility for the failure to free the hostages.
The government had repeatedly stressed that Nepal, which is fighting a bloody Maoist rebellion, was not part of the US-led coalition in Iraq.
Deuba appealed for calm in an address to the nation Wednesday.
"The terrorists who committed this gruesome act don't have any religion or principles. I call upon all citizens of Nepal to have patience," he said.
"We made honest efforts to save them but the militants never spelt out their conditions," Deuba said. "We are now trying our best to bring back the bodies of the victims."
His government announced compensation of one million rupees (14,400 dollars) for the families of each of the 12 slain hostages, a major sum in the one of the world's poorest countries.
The Himalayan capital's skies were patrolled by army helicopters, which were last called out last week when Maoist rebels fighting to overthrow the monarchy ordered a halt to traffic to and from the city of 1.5 million people.
Hindus make up more than 86 percent of the population in Nepal, the world's only officially Hindu state. But the kingdom has experienced little of the inter-religious violence that has scarred neighbouring India.
Muslims account for 3.8 percent of the 27 million population. Some 7.8 percent adhere to Buddhism in Nepal, which is the birthplace of the Buddha, with smaller religions comprising 2.2 percent.
Spontaneous protest strikes were called in the towns of Pokhara, Gorkha and Biratnagar with youths taking to the streets to stop vehicles.
A statement announcing the killings was posted on an Islamist website by an Al-Qaeda-linked group called the Army of Ansar al-Sunna.
It was accompanied by pictures of the grisly beheading of a blindfolded hostage, including one where his bloodied head was held up like a trophy by a hooded captor. A video showed the other Nepalese being shot.