The clashes were reported to have started late on Saturday, with gangs attacking religious places, houses, shops and vehicles after some Hindus tried to replace green Muslim flags with their saffron banners.
More than 100 people were arrested as the violence spread through the predominantly Muslim "old city" of Hyderabad, with crowds pelting each other with stones at each other near the Charminar mosque.
Five mosques and one Hindu temple were damaged, police said.
About 1,800 paramilitary personnel were deployed to help the police, who used rubber bullets, teargas shells and baton-charges to disperse the mobs and to bring the situation under control.
|Hundreds of paramilitary forces and police were deployed to restore order [Reuters]
"These people here are damaging vehicles, beating women, what sort of humanity is this, in which religion is it written to beat others," Durga Prasad, an advocate of Andhra Pradesh high court, said.
"There is no humanity left here and people are behaving like animals and not like humans."
Police remained alert on Tuesday as the festival, celebrating the birth of the Hindu monkey god Hanuman, got under way.
Hyderabad has a population of eight million, nearly 40 percent of them Muslims.
It has historically suffered from communal tensions which have been increased since the proposed division of the Andhra Pradesh state.
Hyderabad, home to Indian headquarters of Google and Microsoft, has attracted major investment from global information technology and pharmaceuticals firms, and is a symbol of India's emerging economy.
Frequent strikes as well as road and rail blockades have caused widespread disruption to businesses in the last year.
Analysts say the turmoil has created a sense of uncertainty among investors, though social networking group, Facebook, chose the city in March for its first office in India.