KATHMANDU, Sept 1: Police shot dead two men on Wednesday after crowds attacked a mosque in Kathmandu and charged through the streets chanting anti-Muslim slogans to protest against the killing of 12 Nepalese hostages in Iraq.

Protesters stormed Kathmandu's main mosque and set furniture and carpets on fire before police drove them out. Police clamped an indefinite curfew on the capital and later fired on a group of people who had gathered in downtown Kathmandu despite the ban, killing one man, an official said.

Another man was killed and three others were wounded when police fired to break a mob trying to storm the Egyptian Embassy before the curfew was imposed, the interior ministry said.

The city's skies were patrolled by army helicopters, which were last called out last week when Maoist rebels fighting to overthrow the monarchy ordered a halt to traffic to and from the capital.

Calm gradually returned after the curfew took effect at 2pm (0815 GMT) and most of the capital's streets emptied. King Gyanendra urged people of different faiths to stay calm in a nation already torn by the Maoist revolt.

"We must ensure this tragic incident does not weaken the age-old fraternal ties, unity and mutual tolerance that exists among the Nepalese people," the royal palace said in a statement.

Earlier, protesters burst into the offices of Saudi Arabian Airlines, Qatar Airways, a manpower recruitment company, and a media company which runs a television station and publishes newspapers, smashing windows and taking papers and furniture to the street to burn.

Police lobbed tear-gas shells and fired water cannon at about 3,000 demonstrators burning tyres at a main intersection near the Jama Masjid in the heart of the city.

For much of the day, a pall of smoke hung over the capital after tyres were set on fire at almost every major street corner. Crowds brought out logs and firewood to feed the flames.

A militant Iraqi group said on Tuesday that it had killed the 12 Nepalese hostages, who went to Iraq to work as cooks and cleaners for a Jordanian firm. Protesters raised anti-Muslim slogans and called for the government to resign for doing too little to protect the victims.

There is no history of significant anti-Muslim protests or riots in Nepal, which is overwhelmingly Hindu but has a small Muslim minority.

CLOUDS OF SMOKE: Riot police cordoned off the mosque, which was obscured from afar by thick clouds of smoke rising from burning tyres on roads leading to the building.