At least nine people were killed and dozens wounded in the clash, which underlined the concern at the spread of Islamic extremism in a country struggling to combat Taliban and al Qaeda militants.
Early Wednesday, Pakistan's government slapped a curfew in central Islamabad and ordered paramilitary and military troops to storm the mosque, reports CBS News' Farhan Bokhari.
Eyewitnesses on Wednesday morning said frequent gunfire was heard from the neighborhood surrounding Lal Masjid, or Red Mosque, adds Bokhari. Aasim Ali Rana, a reporter for Pakistan's GEO TV, in a live report from the scene said, "Rangers (paramilitary troops) have set up barricades and preparations are underway to block the roads around the mosque."
The violence dramatically deepened a six-month standoff at the mosque, whose hard-line clerics have kidnapped alleged prostitutes and police officers in their efforts to impose a Taliban-style version of Islamic law in the capital.
Deputy Interior Minister Zafar Warriach said the dead included four students, three civilians, one soldier and a journalist. Clerics at the mosque claimed 10 of their supporters were killed, according to a lawmaker sent to mediate the dispute.
Warriach said 148 people were injured, most of them by tear gas fired by security forces.
At nightfall, the city's top security official, Khalid Pervez, said a cease-fire had been reached with the militants. But Warriach emerged early Wednesday to say authorities had run out of patience and demanded the militants lay down their weapons.
"No action will be taken against those who do it, but if anyone displays weapons and comes out, he will be answered with bullets," Warriach said after a meeting of top officials, including Pakistan's president, Gen. Pervez Musharraf.
Warriach did not announce any deadline for the militants to surrender, but warned that "the government has decided that those people from the madrassa who are defaming Pakistan and Islam will face an operation" by police and paramilitary troops.
Officials said the unrest began Tuesday morning when police tried to stop militant students from occupying a government building. Reporters saw dozens of students, including young masked men with guns and black-robed women with long poles, moving toward security forces about 200 yards from the red-walled, white-domed mosque.