The Shiite town of Awamiya, on the Gulf coast, has seen repeated security incidents in recent years.
Pictures purportedly from the scene circulating on social media showed smoke rising over the area, where bulldozers, excavators and police armoured cars were stationed.
A resident reported gunfire around the old section of Awamiya, known as Almosara, and said children were not able to sit their school exams.
"People are so scared, so they have hidden in their houses", the resident said, asking for anonymity.
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In March the ministry said a teenage suspect died from wounds after Saudi police "responded" under fire while looking for suspects hiding among abandoned homes that were to be redeveloped in Almosara.
A local resident at that time told AFP that people had been living for more than a month in Almosara, resisting the urban renewal project.
They had no water and their electricity came only from generators, the resident said, adding that they wanted to be given new houses and the area kept as a historical district.
Today, a second resident reported that authorities had sealed off roads in the area.
Awamiya, a town of 30,000 in the Shiite-majority Qatif district, was the home of Nimr al-Nimr, a Shiite cleric put to death in January last year for "terrorism."
Nimr was a driving force behind protests by Shiites that began in 2011 and developed into a call for equality in the Sunni-majority kingdom.
Most of Saudi Arabia's Shiites live in the oil-rich east, where they have long complained of marginalisation.