Islamist commanders have acknowledged firing over demonstrators in the town, but denied that anyone had died or been injured.
The protest erupted just hours after the Islamists seized Kismayo late on Sunday from the Juba Valley Alliance, a government-allied militia, in a new setback for Somalia's weak administration.
Witnesses said Islamist gunmen shot at protesters outside the militia's former offices during protests over the removal of the Somali flag.
"Two people were killed and three others were wounded," said Kismayo resident Ahmed Sahal, who said the unrest began after the Islamists were given an initially wary, but largely friendly, welcome to the town.
He said the protesters had been complaining about the replacement of the Somali national flag with an Islamist banner, inscribed in Arabic with the phrase "There is but one god and Mohammed is his prophet".
Leyla Ahmed, another Kismayo resident, said shooting appeared to have started start when a crowd outside the JVA office became angry that the old flag was taken down.
"Some of the demonstrators were armed and they got violent when they saw the flag removed from the headquarters," she told the AFP news agency. "The situation is very tense and people cannot move."
Sheikh Hassan Yakub, the commander of the Islamist forces in Kismayo, denied that anyone had been killed or wounded in the incident he described as "self defence" that began when stones were thrown at his fighters.
"I want to tell you that no one was killed, this is a lie, an absolute lie," he told AFP. "This is a wishful thinking by those who want to see Somalia bleeding all the time."
In Mogadishu, a senior official with the Supreme Islamic Council of Somalia (SICS) also denied the witness accounts of deaths and injuries.
Islamists denied anyone had been
killed or wounded in Kismayo
Islamist forces rolled into Kismayo, about 500km south of Mogadishu, without firing a shot late on Sunday after the JVA leader Barre Shire Hirale, Somalia’s defence minister, fled.
JVA officials said their retreat to an area about 40km southwest of the town had been a "tactical withdrawal" intended to avoid needless bloodshed and pledged to recapture the port.
But after their departure, hundreds of turbaned, heavily-armed fighters on "battlewagons," machine-gun mounted pick-ups, took up positions in and around Kismayo and pledged to impose Sharia law in the town, witnesses said.
The retreat of JVA gives the Islamists, who already control the capital and much of southern Somalia, a new and strategic position from which they say they will block the deployment of foreign peacekeepers proposed to aid the government.
Sheikh Muktah Robow, SICS deputy security chief, speaking to AFP, said: "The main objective is to close down the border with Kenya in order to stop the deployment of foreign troops."
Kismayo is about 150km east of Somalia's border with Kenya.
In the temporary government seat of Baidoa, officials said they were deeply concerned about the situation in Kismayo and that the Islamist's attempt to take the town was "negative."
"Their move is unpopular in Kismayo and generally it is a negative move for peace and reconciliation"
Abdurahman Dinar,i government spokesman
"Their move is unpopular in Kismayo and generally it is a negative move for peace and reconciliation," Abdurahman Dinari, government spokesman, told AFP.
The fall of Kismayo is a severe blow to the government and its hopes for the deployment of a nearly 8,000-strong regional east African peacekeeping force.
Despite fierce Islamist opposition, the seven-member Inter-Govermental Authority on Development (IGAD) has approved African Union-endorsed plans to send troops to salvage the government it helped to create in 2004.
But it faces numerous hurdles, not the least of which are Islamist intent to fight the force, a lack of money to pay for the mission and logistical problems now including no port in which to land the troops.
The internationally-backed but largely powerless administration is the latest in more than a dozen attempts to restore stability to Somalia, which was plunged into anarchy after Mohamed Siad Barre was toppled from power in 1991.