Mohammad Saleem, a correspondent for The Dawn newspaper in Pakistan, told Al Jazeera: "The clashes erupted when a boy of a Christian community allegedly desecrated a few pages of the holy Quran.
"The Christians said the Muslims were in a mood to attack the locality."
Police said that unrest between the two groups of villagers first flared late last month over a dispute over the Muslim holy book, which was later resolved.
But tensions erupted on Saturday when the Christian group were attacked again and their houses set on fire.
"Today, according to our information ... this is the same issue of alleged desecration of the Quran," Inkisar Khan, the city police chief, told reporters.
"All the dead are Christians. I was told that they were burned alive."
Television footage from the area showed police using tear gas to disperse an angry mob.
Desecrating the Quran is punishable by death under the blasphemy laws of mainly Muslim Pakistan, but no such sentences have been carried out.
Christians, who make up less than three per cent of Pakistan's population of 150 million, say the blasphemy laws are used as an excuse to victimise them.