Police fired dozens of tear smoke canisters and warning shots to disperse the people throwing stones and resorting to arson.
Unconfirmed reports said one person was killed during the clashes.
According to officials, the clashes broke out on Friday night and were going on until Saturday morning in Aurangabad, about 334 km northeast of Mumbai, the capital of Maharashtra.
Television images showed flames leaping from the burnt shops and police patrolling the deserted streets.
Reports said clashes broke out over rumors that municipal corporation has disconnected water connections of a particular community, following which situation turned violent. The two groups stepped out of their houses, pelted stones at each other and torched shops and vehicles.
Authorities have imposed prohibitory orders restricting assembly of more than four people in public places to contain the situation.
"We appeal people not to heed to the rumors and maintain calm," a senior police official posted in Aurangabad said.