A parliamentarian said that helicopters carrying special police units were sent in to break up the protests in the village of Khatunabad, near Shahrebabak, in south-eastern Kerman province.
Workers had downed tools a few days earlier to support their demands for permanent contracts, the reformist deputy said.
Special forces attacked the village and the clashes spread to Shahrebabak, where four people were killed, he said.
MPs criticised the authorities for failing to handle the crisis, saying police had launched an "illegal operation which humiliated people," and called on President Muhammad Khatami and parliament speaker Mehdi Karubi to intervene.
Trade unions have no bargaining power in Iran, where the right to strike does not exist.
Iran's main armed opposition group, the People's Mujahidin, charged on Sunday that as many as 15 protesters were killed in the clashes, including a 31-year-old woman and a 15-year-old girl.