Thousands of demonstrators stormed the main mosque in Katmandu on Wednesday and charged through the streets of the capital chanting "Down with Islam" in protest of the killing of 12 Nepalese hostages in Iraq.
The crowds set furniture and carpets on fire and tore up a copy of the Koran before police drove them out. Hours after the protests began, officials imposed an indefinite curfew on the city and warned that violators would be shot on sight.
Police fired on a group that had gathered in downtown Katmandu despite the curfew, killing one man, an official said. Another man was killed and three were wounded when police opened fire to break up a mob trying to storm the Egyptian Embassy before the curfew was imposed, the Interior Ministry said.
King Gyanendra urged people of all faiths to stay calm. Nepal is a largely Hindu country with a small Muslim minority.
"We must ensure this tragic incident does not weaken the age-old fraternal ties, unity and mutual tolerance that exists among the Nepalese people," the royal palace said in a statement.
A radical group said Tuesday that it had killed the 12 Nepalese hostages who had gone to Iraq to work as cooks and cleaners for a Jordanian firm.