At least six people have been killed in clashes between crowds of Kosovo Serbs and Albanians in the flashpoint northern town of Mitrovica.
It is the worst violence since the end of the war in Kosovo
More than 200 were reported injured in heavy bursts of gunfire.
At least 11 French soldiers with the Nato-led peacekeeping force were also hurt, two seriously.
Tensions flared in the town on Tuesday when three Albanian children drowned, allegedly as they were trying to escape from Serbs who chased them with a dog.
Their deaths came a day after an 18-year-old Serb was wounded in a drive-by shooting in central Kosovo, prompting clashes between Serbs and Nato peacekeepers.
Renewed violence has been reported at the scene of Monday's shooting incident, close to the village of Caglavica.
A spokeswoman for the United Nations police force told the BBC Albanian Service two Serb-owned houses had been blown up and the situation in Caglavica appeared to be out of control.
In Mitrovica, Angela Joseph said, the situation had been stabilised, even though reporters at the scene say sporadic gunfire can still be heard.
Mitrovica has seen some of Kosovo's worst post-war violence but has been relatively quiet for more than a year.
Wednesday's clashes have been the worst for four years in terms of loss of life, says the BBC's Nick Thorpe.
Hundreds of Kosovo Albanians converged on the southern part of the divided town to vent their rage after the boys drowned in the Ibar River. Kosovo Serbs controlling the northern part also started gathering for the confrontation.
Peacekeepers blocked off a bridge separating the Serbs and Albanians and fired tear gas, rubber bullets and stun grenades to keep the angry crowds apart.
But as the Albanians tried to force their way across the bridge, there were bursts of gunfire - a reported grenade explosion.
Reporters said they had seen an Albanian firing a submachine gun towards the crowd of Serbs on the other side of the bridge.
Four Albanians and two Serbs are believed to have been killed. Initial reports suggested three Serbs had died.
Hospital sources said up to 250 people had been injured.
The French soldiers were wounded by stones or shrapnel from a grenade, Capt Athanasios Zormbas, a spokesman for the Nato force, said.
In the Serbian enclave of Caglavica, angry Serbs have blamed Albanians for Monday's shooting attack on a Serb youth and protested by blocking the road that links Kosovo with Macedonia.
Nato peacekeepers then set up their own barricades to keep the crowds apart, but the Albanians broke through and marched on Caglavica.
Kosovo's top political leaders - including UN administrator Harri Holkeri - have condemned the violence and Prime Minister Bajram Rexhepi has gone to the troubled town.
Mr Rexhepi urged the Nato peacekeepers to restore calm - and a similar call came from his Serbian counterpart, Vojislav Kostunica.
The Serbian government has scheduled an emergency session on Wednesday afternoon.
Mitrovica has been a flashpoint since the UN took over the administration of Kosovo in 1999 after Nato air strikes forced a Serb withdrawal.
Around 200,000 Serbs left Kosovo, but some remained in isolated enclaves or more homogeneous blocs, like northern Mitrovica.
Kosovo's future status is unresolved.
The new Serbian prime minister recently proposed that the province be either divided into cantons or split on ethnic lines.
That was immediately rejected by the UN's Mr Holkeri, who held talks with Mr Kostunica in Belgrade.