Tens of thousands of devotees, including from India, flocked to the festival, which is held every five years at the Gadhimai temple at Bariyarpur village in Bara district of southern Nepal.
Worshippers believe the animal sacrifice, meant to appease Hindu goddess Gadhimai, brings them luck and prosperity.
5,000 buffaloes were slaughtered by some 400 slaughterers on Friday, the first day of animal sacrifice, according to police.
Thousands of goats, pigs and chickens will also be sacrificed before the festival ends today.
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However, in a sign that the campaign to end the practice may have had some impact, the number of buffaloes killed dropped to about 5,000, half the number slaughtered when the festival was last held five years ago.
India's Supreme Court had recently ordered the government to stop the export of cattle to Nepal during the Gadhimai festival.
The organising committee of the festival has banned journalists and photographers from taking pictures of slaughtering.
Meanwhile, a one-year-old child and an elderly woman from Bihar in India died during the festival yesterday.