Two people have died and at least 21 have been wounded after police opened fire on a crowd of protesters in Biratnagar, 200km southeast of Kathmandu.
Police opened fire on the protesters, a Madhesi group demanding autonomy for their region in southeast Nepal, after they broke a curfew on Tuesday, officials said.
"There are stains of blood on the ground where the shooting took place. People are scared and it is tense here," Bikram Niraula, a local journalist from Biratnagar, said.
Officials say 21 people have been killed and hundreds hurt in clashes over the past month between protesters and police in the Terai region, situated in Nepal's southern plains and home to most of the Madhesis.
The protesters want an autonomous region for the southern plains within a federal state.
They say Nepal's ruling powers are dominated by people from the mountain areas who have denied Madhesis fair representation in parliament, as well as a fair share of jobs in the government, police and army.
The protests from the Madhesi People's Rights Forum have overshadowed a peace deal between the government and Maoists aimed at ending a decade-old conflict between the two groups, which has killed more than 13,000 people.
The government says it is ready for talks, but protest leaders insist Krishna Prasad Sitaula, the home minister who Madhesi leaders accuse of using "excessive force", must resign before negotiations take place.
Girija Prasad Koirala, the Nepali prime minister, was meeting leaders of the ruling government alliance and Maoists to discuss the unrest on Wednesday.
The trouble started in January from the town of Lahan in the same region where a Maoist activist shot dead a protester.