The violence marked the fourth consecutive night of violence in Tehran, but on a much wider scale.
Clashes were reported in scores of locations throughout the capital, particularly in areas surrounding Tehran University's dormitory complex — the scene of recent protests.
Witnesses said security officers fired tear gas to disperse crowds of hundreds people, mainly interested onlookers in cars and in doorways to houses, who had gathered to watch the heavy police presence in the area.
It was unclear what sparked the clashes, which involved hundreds of hard-line militants — some in groups of two to four, others on motorcycles — firing machine-guns in the air, beating pedestrians with batons, hurling rocks or punching people.
No organized protests were seen late Friday, unlike previous nights' when hundreds of people opposed to Iran's hard-line clerical regime gathered to chant slogans denouncing the government and calling for the supreme leader Ayatollah Ali Khamenei's death.
The militants were backed by hundreds of security forces, whose roles is to crack down on protests and public disturbances.
Hundreds more regular police who have been on patrol for days in the city in an attempt to bring calm did not intervene in Friday night's clashes, witnesses said.
The police had locked down the capital, lining all streets leading to the dormitory housing Tehran University students — who sparked this week's first protests.
CBS News Correspondent Richard Roth reports that at a mosque in the capital Friday, with the faithful chanting "down with America," former President Rafsanjani warned students -- who've been calling for more freedom in Iran -- don't fall into an American trap by taking protest too far.
The protesters had denounced the country's supreme leader, hard-liner Ayatollah Ali Khamenei.
"Khamenei, the traitor, must be hanged!" they chanted, witnesses reported. Criticism of Khamenei is usually punished by imprisonment, and public calls for his death had been unheard of until this week.
The pro-Khamenei vigilantes chanted: "Oh, exalted leader, we are ready to follow your instructions!"
Thousands of people looked on, sometimes clapping with the protesters and taking up their chants. Residents near the university hospital left their doors open so that demonstrators could find quick shelter if the authorities moved in.
Traffic was bumper-to-bumper in downtown Tehran until the early hours of the morning as curious residents stayed out to watch developments.
Khamenei warned of a major crackdown in a speech broadcast on state television and radio Thursday.
He referred to violence in 1999, when security forces and extremist supporters of hard-line clerics attacked pro-democracy demonstrators after a student hostel was stormed. The raid on the hostel led to the death of at least one student and generated the worst street battles since the 1979 Islamic Revolution.
"If the Iranian nation decides to deal with the (current) rioters, it will do so in the way it dealt with it on July 14, 1999," Khamenei said.
"It should not be allowed that a group of people contaminate society and universities with riots and insecurity, and then attribute it to the pious youth," he said.
Some protesters have vowed to continue demonstrating until next month's anniversary of the 1999 protests.
Reformist newspapers, which reflect the thinking of liberal politicians who have been fighting for change, offered little commentary on the unrest.
Exiled opposition groups have been encouraging dissent in Iran through U.S.-based Persian language TV channels. U.S. pressure on Iran, which Washington accuses of hiding a nuclear weapons program and harboring terrorists, may have further emboldened those who hope to see the regime toppled.
Some in the U.S. who want regime change have advocated more direct support for the Iranian opposition.
"It's our hope that the voice of the Iranian people in their call for democracy and the rule of law will be heard and transform Iran into a force for stability in the region," Richard Boucher, spokesman for the State Department, said in a briefing Thursday.
"We view with concern the arrests of protestors taken into detention simply for voicing their political views, and we expect the regime to protect their human rights and release them," Boucher continued. "We applaud the Iranian people for calling attention to the destructive policies of the Iranian Government that do such a disservice to its population."
This week's demonstrators have also called for the resignation of President Khatami, accusing him of not pushing hard enough for democratic reforms.
Khatami does not have the support of the hard-liners who control the judiciary, the security forces and other unelected bodies. But the hard-liners do not enjoy popular support, leaving the two sides of government in a stalemate.