The army opened fire at the people around midnight on Wednesday, said Bashanta Raj Bhattarai, the chief administrative official of Bhakatpur district.
He said he was not sure about the exact number of casualties but witnesses said at least a dozen had died.
Other details were not immediately available.
Royal Nepalese Army spokesman Col. Umesh Bhattarai confirmed there were several civilian casualties and said the army was investigating to find out the cause.
A local government official who demanded anonymity said the soldiers may have mistaken the civilians for communist rebels.
The army has been on high alert since the rebels stepped up attacks earlier this year.
The rebels, who say they are inspired by Chinese communist revolutionary Mao Zedong, have been fighting since 1996 to topple Nepal's monarchy and establish a communist state.
About 12,000 people have died in the insurgency.