Protesters on Wednesday stormed inside the city's main mosque, set furniture and carpets on fire and tore up a copy of the Quran, before being driven out by police.
Chanting "Down with Islam" to protest the killing of 12 Nepalis in Iraq, they rampaged through the city's streets and fought running battles with police.
Police clamped an indefinite curfew and later fired on a group of people who gathered in downtown Kathmandu despite the ban, killing one man, an official said.
Calm gradually returned after the curfew took effect at 1400 (0815 GMT) and most of the capital's streets emptied.
Earlier, crowds of people burst into the offices of Saudi Arabian Airlines and Qatar Airways, smashing windows and taking papers and furniture onto the street to burn.
Aljazeera reported that Pakistan International Airlines (PIA) was also ravaged.
Police burst tear-gas shells and
water cannons to disperse mobs
Clashes with police also erupted outside the Egyptian embassy as a group ransacked the adjoining offices of a manpower recruitment company.
Police lobbed tear-gas shells and fired water cannons at about 3000 demonstrators burning tyres at a main intersection near the Jame Masjid mosque in the heart of the city.
For much of the day, a pall of smoke hung over the capital of the Hindu kingdom after tyres were set on fire at almost every major street corner. Crowds brought out logs and firewood to feed the flames.
Authorities said they had imposed the curfew "to maintain law and order, and to protect the loss of life and property".
Mosque cordoned off
Riot police cordoned off the mosque, which was obscured from afar by thick clouds of smoke rising from burning tyres on roads leading to the building.
"Demonstrators entered the mosque, threw stones and partially damaged it," said police official Binod Singh. "They tried to set the building on fire but police intervened and prevented them."
"I appeal to everybody to show restraint and not engage in provocative activities aimed at any community"
Sher Bahadur Deuba,
prime minister, Nepal
Offices of manpower companies which recruit Nepalis to work abroad were also indiscriminately attacked and their contents burned on the streets. A media company which runs a television station and publishes newspapers was also attacked.
Prime Minister Sher Bahadur Deuba declared Thursday a national day of mourning "to show unity against terrorism".
"I appeal to everybody to show restraint and not engage in provocative activities aimed at any community," he said in a national address. He promised victims' families would be given one million rupees ($14,000).
"This inhuman act is against Islam," a Nepali Islamic group said in a statement condemning the killing of the 12, the largest number of foreign captives killed at one time by an armed group in Iraq.