A gun battle has erupted between soldiers and Muslim Brotherhood protesters holed up in a mosque in central Cairo.
Egyptian TV footage showed gunmen firing from inside the minaret of the al Fath mosque in Ramses Square - moments after images emerged of tear gas canisters being thrown at protesters inside the building.
Witnesses said tear gas was fired into the mosque prayer room to flush out protesters, who refused to leave the premises.
Pictures also showed soldiers dragging the supporters of ousted president Mohamed Morsi out of the building as they dismantled a makeshift barricade and stormed the building to clear it.
Soldiers fired back after gunfire appeared to come from the minaret
The fresh violence flared after hours of negotiations between the two sides - and news that Egyptian Prime Minister Hazem el Beblawi had proposed disbanding the Muslim Brotherhood and that the idea was being considered by the government.
It also emerged that Mohamed al Zawahri - brother of al Qaeda chief Ayman al Zawahri - had been arrested in Egypt for supporting Mr Morsi.
An Egyptian presidential spokesman said the country was facing "war by the forces of extremism" and vowed to "confront terrorism through security measures".
Hundreds of Muslim Brotherhood supporters had barricaded themselves inside the mosque overnight, which was turned into a makeshift field hospital for the wounded and a morgue for some of those killed in the protests.
Protesters don masks as tear gas canister are thrown into the building
Four Irish citizens - children of Hussein Halawa, the Imam of Ireland's biggest mosque in Dublin - on a family holiday to Egypt with their mother, were among those in the building.
Omaima Halawa, 21, who was with her two sisters Somaia, 27, and Fatima, 23, and brother Ibrihim, 17, earlier described the scene as frightening, and said a group of women had been escorted out of the building.
Tensions remained high as a pro-military crowd - and supporters of the deposed Mr Morsi - assembled in front of the building.
The Muslim Brotherhood's London-based spokeswoman Mona al Qazzaz claimed on Sky News that the security forces were responsible for the minaret gunfire - using it as a cover to storm the mosque and remove protesters.
With the Brotherhood vowing to press on with daily protests, more widespread violence is expected across Egypt.
A woman being escorted out of the mosque
Speaking to Sky News from Cairo, journalist Jared Malsin, said: "Most people are bracing for another wave of demonstrations, as soon as later today.
"The willingness of the security forces to use deadly force over the last several days, and the willingness of the Muslim Brotherhood to continue mobilising in the face of that deadly force show I think that we are going to see more of the same in the coming days and weeks."
He said he believed the country was "more deeply polarised than ever" and that he had witnessed "citizen-organised, vigilante squads" cropping up in individual neighbourhoods in Cairo.
"In some neighbourhoods they are pro-military, like the one that I ran into yesterday. These are people who are arming themselves with sticks and knives to keep out Muslim Brotherhood people. That in a sense is a worrying development."
State TV ran an English 'Egypt fights terrorism' caption as the PM spoke
Mahmoud Badr, the youth leader whose petition campaign helped oust Mr Morsi, said the bloodshed was a price worth paying to rid Egypt of Muslim Brother hood rule.
"What Egypt is passing through now is the price, a high price, of getting rid of the Brotherhood's fascist group before it takes over everything and ousts us all," Badr, 28, told Reuters in a telephone interview.
In London, demonstrators held a protest against the violence outside the Egyptian embassy.
An explosion damaged the front of the Egyptian consulate in Benghazi, Libya, but no injuries were reported.
More than 1,000 protesters were arrested by police across the country during a "day of rage" on Friday, of which 558 were held in Cairo.
A pro-government crowd tried to attack the Muslim Brotherhood supporters
The arrests came after tens of thousands of Brotherhood supporters clashed with armed vigilantes and security forces in the fiercest street battles to engulf the country since the country's Arab Spring uprising.
Tear gas could be seen during flashpoints in parts of Cairo, with protesters apparently hurling bottles and rocks at security forces.
On what the Brotherhood called the "march of rage" in response to the deaths of 638 people on Wednesday when security forces raided two sit-in protests, officials said at least 173 people, including 10 police officers, were killed.
Ammar Badie, one of the sons of the Muslim Brotherhood's spiritual leader Mohamed Badie, was among those killed, the group's Freedom and Justice Party said on its Facebook page.
The 38-year-old died of a gunshot wound while taking part in protests in Ramses Square.
The whereabouts of his father, who has been charged with inciting violence, are unknown.
It is the worst violence the country has seen since the 2011 uprising and ousting of former Egyptian president Hosni Mubarak, under whose rule the Muslim Brotherhood was outlawed as a political organisation.
His trial on charges of complicity in the deaths of protesters has been adjourned until August 25.