Witnesses and police said nine people, including eight of a family, were burnt to death and another died in gunshot as a camp of Biharis was set on fire over the dispute. Several others were also wounded in the violence later.
"The clash erupted between the local Bengali youths and the Biharis this morning over exploding crackers and fireworks marking the Shab-e-Barat night...The Bengalis set fire at a house, causing the casualties," Dhaka's additional deputy police commissioner Jasim Uddin told a TV channel.
The Biharis said the rioters torched 10 houses and looted valuables. They also alleged that police fired gunshots at the camp residents critically wounding several while one of inmates later died at the state-run Dhaka Medical College Hospital (DMCH).
The neighbourhood Bengali residents said the Biharis had a brawl with police after midnight when a police patrol team asked them not to explode crackers. The racial violence erupted in the morning.
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The DMCH doctors said they were treating a number of people with bullet and stab wounds alongside burn injuries.
Witnesses said police intervened and used rubber bullets to disperse the Biharis as they took to the street at the neighbourhood while the charred bodies lied on road as the Biharis declined to hand them over to police for autopsy.
"We are asking the Biharis to hand over the bodies but they are not cooperating," a police official told newsmen at the scene.
TV channels reported police could not enter the camp area but cordoned it off and blocked the roads around fearing escalation in violence.
Although not all came from the Indian state of Bihar, they are referred to as "Biharis" in Bangladesh.
Most of the Biharis were opposed to Bangladesh's 1971 independence and waited for decades to go to Pakistan, but the subsequent governments in Islamabad declined to take them back.