Sporadic violence has plagued West Bengal state's Nandigram area, where farmers have fiercely resisted authorities' efforts to force land sales at cheap rates so an industrial zone can be set up.
The latest fighting started Monday night when members of the governing Communist Party of India (Marxist) entered Nandigram and met stiff resistance from the local farmers' Land Acquisition Resistance Committee, state Home Secretary Prasad Ranjan Roy told reporters.
Two people were killed and 10 others were injured, Roy said.
Fighting continued Tuesday with both sides using guns and crude bombs, said local police chief S. S. Panda.
"The situation is quite unstable, but we are trying to bring it under control," Panda said.
More than 30 people have died in Nandigram since January over plans to build the industrial zone, which was to include a shipyard and petrochemical plant.
The plan was officially abandoned in March after 14 people died in battles with police. However, violence has persisted as the communist party, which has governed the state for nearly three decades, keeps pushing for the project.