Tension between the Han Chinese and Uighurs are common in Xinjiang province.
Adam Grode, an American Fulbright scholar studying in Urumqi, said he heard explosions and saw injured protesters carried off on stretchers as well as a bloodied Chinese man entering a hospital.
Grode also said the police used tear gas, fire hoses and batons to disperse the crowd.
"Every time the police showed some force, the people would jump the barriers and get back on the street," Grode said. "It was like a cat-and-mouse sort of game."
Gulinisa Maimaiti, a 32-year-old employee of a foreign company who took part in the protest, said the violence was set off by a protest in People's Square to demand an investigation into a brawl on June 25 between Uighur and Han Chinese workers at a toy factory in southern China.
A 23-year-old woman belonging to the Hui, another local Muslim minority, said the public bus she had been on was attacked by dozens of Uighurs.
Uighur separatists have waged an intermittent campaign for independence for several decades, prompting the constant presence of armed police and riot squads in the region.
In 1997, a protest against religious restrictions by several hundred Uighurs ended with at least 10 dead.