The incident took place late last night and the victims were identified as Imran Babakhan Pathan (28) and Mohsin Razzaq Talab (25), Police Inspector C D Rathod of Rajkot city 'B' division police station said.
The clash, which broke out over some trivial issue, took an ugly turn when members of both the groups attacked each other with sharp weapons, Rathod said.
A group led by Pathan alleged that Talab had stolen some fire-crackers on Diwali night from Pathan's shop, while Talab refuted the allegations and entered into argument with the other group, he said.
While Pathan died on the spot, Talab succumbed to injuries during a treatment at a private hospital, he said.
Five persons have been arrested in this connection so far and a case has been registered under IPC section 302 (murder), Rathod said.