Clashes in nearby Gujarat have claimed more than 700 lives
Police said the violence began late on Tuesday in Kalyan town in Thane district after a dispute between a Hindu and a Muslim escalated into a mob fight.
Police finally dispersed the crowds and imposed a curfew at the scene of the fighting, which also left 15 people wounded, including 11 policemen.
Officials said the atmosphere there was still tense but under control and there have been no fresh incidents of violence.
More than 700 people, mostly Muslims, have died in communal riots in the neighbouring state of Gujarat in the last month.
Police wounded
Joint District Police Commissioner Ambalal Varma said the clashes were sparked by a minor argument, which turned ugly when members of both communities confronted each other in a crowded market place.
The crowd was dispersed after a baton charge by the police.
But the situation deteriorated again around midnight when a member of the rightwing Hindu nationalist Shiv Sena party was stabbed.
He succumbed to his injuries while being rushed to a local hospital.
Rioters then returned to the streets, burning some shops and vehicles, dispersing only after the police opened fire.
One woman was stabbed to death in the violence and, according to locals, another woman was also killed.
But police officials said the third death was the result of a cardiac arrest.
So far, fears that the violence in Gujarat would spread to Bombay and surrounding districts have been unfounded.
After Hindu hardliners destroyed the Babri mosque at Ayodhya in 1992, Bombay witnessed some of the worst communal violence that rocked much of India.