Kamal Hyder, Al Jazeera's correspondent in Islamabad, said that a ceasefire agreed by the two sides has been broken.
Early on Wednesday, the authorities clamped a curfew around the mosque, warning that violators would be shot on sight.
"A curfew has been imposed in that particular area," Zafar Warraich, the deputy interior minister, said.
The minister also called on the students to surrender.
A doctor at a nearby hospital said that about 60 people had been taken there during Tuesday's clashes.
Most were suffering from the effects of tear gas, but they also included several students, both male and female, with bullet wounds, he said.
Two members of the security forces were also reportedly being treated at the hospital for gunshot wounds.
Police party attacked
Violence began at the mosque when around 10 students, armed with batons, attacked a police party which was taking up positions around the mosque.
|Two government buildings were set on fire |
by students from the Red Mosque [AFP]
Police then fired teargas at the students, prompting an exchange of gunfire lasting around 15 minutes, witnesses said.
Appeals were made on the mosque's loudspeakers for residents of Islamabad to come to the mosque and help the students and 'mujahideen'.
Hyder said there were speculations that the government may undertake an operation to flush out the students from the mosque within the next 24 hours.
The clashes mark a major escalation in the standoff between the government and the mosque's authorities.
The mosque has been monitored since its students took control of a neighbouring government-run children's library in January.
Tension increased again after students from the mosque began a self-proclaimed anti-vice drive, which included the kidnapping last month of seven Chinese nationals from an acupuncture clinic.
Mosque officials said the clinic was being used as a brothel.