"We want revenge," demonstrators shouted as they stormed the Jama mosque - the only one in the Nepalese capital - on Wednesday. They broke windows and set fire to carpets, furniture and parts of the building, which was empty at the time.
Police fired tear gas in an unsuccessful attempt to disperse the crowd on Wednesday.
The government has clamped an indefinite curfew in a bid to stem the unrest and declared a national day of mourning on Thursday for the victims of the worst hostage killing in Iraq since the US-led occupation.
In other parts of the capital, protesters blamed the government for not doing enough to secure the release of the 12 Nepalese contract workers, who were slain by their captors.
The angry protesters stoned buildings and blocked traffic by burning tyres on main intersections.
The offices of many agencies that send workers abroad also were attacked. They broke windows and set fire to vehicles, furniture, motorcycles and electrical equipment belonging to the the agencies, 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 their premises and smashed furniture before setting the building on fire. A spokesperson for the airline's main office in Qatar told Aljazeera.net it was too early to verify details of the attack.
Angry demonstrators stormed
offices and smashed furniture
Muslims account for 3.8% of the 27 million population in the world's only officially Hindu state. Some 7.8% adhere to Buddhism in Nepal, with smaller religions comprising 2.2%.
A video and pictures posted on a website on Tuesday allegedly depicted the execution by the slitting of the neck of one Nepalese worker and the shooting of 11 others.
They had disappeared soon after entering Iraq from Jordan on 19 August.
Nepal condemned the killings as a "heinous crime against the innocent civilians".
"This barbarian act of terrorism to kill innocent civilians without asking for any conditions for their release is against the minimum behaviour of human civilisation," the government said in a statement.
Families of slain captives are to
receive state compensation
The kidnappers had demanded Nepal stop sending its citizens to work in Iraq, although the government had already banned them from doing so because of safety concerns, and had also rejected US requests to contribute troops.
But many people from the impoverished Himalayan nation work abroad and Nepalese are known to work for foreign contractors in Iraq.
The Nepalese government on Wednesday announced compensation of one million rupees ($14,400) to the family of each of the 12 slain hostages, a major sum in the one of the world's poorest countries.
Iraq's leading Muslim authority, the Association of Muslim Scholars, has condemned the killing, saying the captives were "simple people" who did not deserve their fate.
"I call on all groups who claim they are resistance and Islamic groups to be more merciful, just and humane while dealing with captives despite their religion, trends and reasons behind their presence in Iraq"
Dr Harith al-Dhari,
AMS secretary general
Dr Harith al-Dhari, secretary general of the AMS, told Aljazeera that "we are against killing hostages, particularly if it has been a group execution".
"Those 12 Nepalese hostages are simple people. They might have been deceived to serve the occupation forces."
"I wish they had not been treated so cruelly," he added.
Al-Dhari also called for the fair treatment of all persons in Iraq, irrespective of religion and creed.
"Through Aljazeera, I call on all groups who claim they are resistance and Islamic groups to be more merciful, just and humane while dealing with captives despite their religion, trends and reasons behind their presence in Iraq," he said.