"There is now an expectation that this place [the mosque] will be stormed [by the authorities]," he said.
The mosque has been monitored by scores of security personnel since its students took control of a neighbouring government-run children's library in January.
Tension increased 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 a brothel.
On Tuesday, reports said women dressed in burqas stood on the rooftops of an adjacent madrasa or seminary, shouting anti-government slogans, while male students armed with staves guarded the entrances to the compound.
Violence began when around 10 students, armed with batons, attacked a police party which was taking up positions around the mosque.
The students took the security forces weapons. Police then fired teargas at the students, prompting an exchange of gunfire lasting around 15 minutes, witnesses said.
Appeals were made on mosque's loudspeakers for residents of Islamabad to come to the mosque and help the students and 'mujahideen'.
After the clashes, students, armed with rifles and some wearing gas masks, reportedly stood outside the walls of the mosque chanting "Jihad! Jihad!".
Nearby bazaars closed down and people ran away, covering their mouth with cloth to protect themselves from the tear gas.