Chinese police clashed for a second day on Tuesday with protesters who stopped the construction of a metals factory, in the latest unrest highlighting grass-roots, environmental concerns in China.

Police fired tear gas and stun guns during the worst of the violence on Monday, according to official accounts and local residents, who both reported that rallies continued on Tuesday despite strong government warnings.

The unrest occurred in the small city of Shifang, which is still trying to recover after being badly hit in a 2008 earthquake that killed 88,000 people in the southwest of the country.

In unusually strong language, Shifang police warned locals on Tuesday they would be "severely punished" if they continued the "illegal" protests.

"Anyone who has incited, planned or organised illegal gatherings, protest marches or demonstrations or those who have engaged in smashing and looting... will be punished severely," the police said in a statement.

"Anyone using the Internet, mobile text messages and other methods to incite, plan or organise illegal gatherings, protest marches or demonstrations must immediately stop their illegal activities."

Two protesters were killed in the protests, rights watchdog Chinese Rights Defenders said, although this could not be independently verified. The local police and government made no reference to deaths in their accounts.

The protesters had gathered at a square near the city government's office on Monday to protest against plans by a company to build a factory that would process a heavy metal.

Residents said in Internet postings they were scared of the damage it would do to the local environment, while complaining that officials had not consulted them about the plant.

It was unclear how many people were involved in the protests, although residents said thousands gathered on Monday.

As the violence escalated on Monday, the local government issued a statement saying construction of the planned factory had been suspended.

However the statement, and warnings from the police, failed to stop more people taking to the streets on Tuesday.

"Whenever the riot police see crowds gather they fire tear gas, this is terrifying," a resident told AFP over the phone on Tuesday afternoon.

A woman from Shifang government's media office also told AFP that protests continued on Tuesday, but gave no further details.

Another Shifang resident posted a plea on Chinese microblog site Sina Weibo for police not to harm the protesters.

"You have fired tear gas, our biggest weapon is plastic water bottles. You are fully armed, we are dressed in simple clothes," the resident posted.

The microblogger confirmed to AFP the posting as authentic when reached by phone, but declined to be named.

Social unrest is a major problem for China's communist rulers, who are struggling to deal with anger across the vast nation of 1.3 billion people over issues such as environmental degradation, rising inequality and corruption.

Protests similar to the one in Shifang are reported regularly, although cases of protesters achieving victories are rare.

In one of the few such wins, local authorities in the northeastern city of Dalian shut down a chemical plant in August last year after thousands of people took to the streets in protest over fears it would belch out carcinogens.

While authorities typically seek to control information about social unrest, Chinese web users take to Twitter-style microblog sites such as Sina Weibo in a bid to get around the censors.

"Shifang" was the most-searched topic on Sina Weibo on Tuesday, with more than 10 million searches.