Several thousand protesters took to the streets for third time in a week on Friday, in support of the soldiers who were sacked after they left their barracks in a row over working conditions.
Marchers wielding planks and steel pipes smashed windows and set fire to cars before police fired tear gas to disperse the crowd.
Antonio Caleres, the director of the state-run Guido Valadares hospital in Dili, said two male civilians were killed.
"We are also treating at least four people with gunshot wounds," he said.
It was not clear how the civilians died but police confirmed they had fired into a crowd of marchers after coming under attack.
Paulo De Fatima, the police chief, said: "Police made an appeal, but they didn't listen ... they beat the police."
Rogerio Lobato, the home affairs minister, criticised both the police and protesters.
"We will arrest all of them and they must be put in jail," he said of the demonstrators.
"As the home affairs minister, I am not too thrilled with the police's action. They should have been able to perform better co-ordination. However the police must use every means necessary to control the situation," he said.
Jose Ramos-Horta, Timor-Leste's foreign affairs minister, said the sacked soldiers themselves were not responsible for the unrest.
Earlier this month, Ramos-Horta said the government was setting up a panel to review the soldiers' complaints.
Timor-Leste, formally known as East Timor, became the world's youngest nation after gaining independence from Indonesia in a UN-backed referendum in 2002.