Sources in the region said at least three ethnic Arabs had been killed and many injured in demonstrations in the southern province of Khuzestan.
The demonstrations were called for by the London-based Popular Democratic Front of Ahwazi Arabs in Iran.
More than 250 were reportedly arrested.
A representative of the group, speaking to Aljazeera from London, said there were movements within and outside Iran pressing for independence of the region, home to at least three million Iranians of Arab descent.
"The demonstrations to mark 80 years of Iranian occupation were peaceful but the Iranian authorities confronted the people with violent means and military force," he said.
He said Iranian military units had besieged several ethnically Arab villages after the demonstration.
Iranian political activist Muhammad Navaseri said Arab residents of Ahwaz, the capital of Khuzestan province, gathered on Friday morning, chanting slogans against alleged government plans to move more non-Arabs in the city.
He said they set fire to banks and police stations in Ahwaz before more than 250 of them were arrested.
Another Ahwaz resident, Yusuf Nabitaraf, said protesters smashed the windows of several banks and set at least one police station on fire.
There has been no official comment from Tehran.
Accusations of ethnic cleansing
The London-based front said there will be forcible relocation of about 3 million ethnically Arab Iranians from the Ahwaz region to other areas inside the Islamic republic.
Protests reportedly have spread
to other Iranian cities in the south
"This is a form of ethnic cleansing to ensure Iran's national security interests," the group said.
A copy of a letter allegedly signed by former vice-president Muhammad Ali Abtahi outlines a plan for changing the population composition in Ahwaz by relocating non-Arabs to the city to make them the majority.
The letter was widely circulated in Ahwaz and other cities in Khuzestan, an oil-rich province that borders Iraq.
Arabs make up more than 3% of Iran's population; Persians account for 51% of the population thought to be more than 70 million.