"The situation is very tense in the city," Micky Rosenfeld, a police spokesman, said.
"Crowds have gathered in several neighbourhoods and police reinforcements have been deployed in order to avoid new clashes."
Unrest erupted on Wednesday when an Arab motorist drove into a neighbourhood where Arabs and Jews live, playing his car stereo loudly as ceremonies marking Yom Kippur were under way, Rosenfeld said.
A group of Jewish youths assaulted the Arab driver accusing him of deliberately disrupting the sanctity of Yom Kippur, a day when observant Jews are not allowed to drive.
"Rumours then spread out, namely from mosques, claiming that the motorist had been killed, prompting several hundred Arabs to take to the streets," Rosenfeld said.
He said that about 100 cars and 40 shops were damaged before roadblocks were set up to dvide the two sides. Several Arabs were arrested.
Protesters injured
Abbas Zakkour, a local Arab parliamentarian, told the Reuters news agency that dozens of people had been injured when police fired tear gas and water cannon at the protesters.
He said that the atmosphere in the coastal city remained tense.
Channel Two television, a private Israeli channel, said that clashes had resumed on Thursday evening but Rosenfeld did not confirm the report.
The ancient port of Acre is populated by both Jews and Arabs who live in adjacent and some mixed neighbourhoods.
Ehud Olmert, the outgoing Israeli prime minister, appealed for calm.
"Peaceful co-existence between Jews and Arabs is essential. Everything must be done to allow the two communities to live side by side," Olmert said in a statement.
'Arab pogroms'
Arieh Eldad, an Israeli nationalist politician, denounced what he called the "Arab pogroms".
"One should not be surprised if Jews take up arms to defend themselves while the police does nothing to protect them," Eldad said.
Mohamad Barakeh, an Arab Knesset member, said that the incident had less to do with Yom Kippur than a deliberate "escalation of racist speech" ahead of municipal elections next month.
"We see a great danger in these attacks. They are similar to the pogroms that Jews were exposed to at the hands of the Nazi gangs in Germany," he said.
On Yom Kippur, observant Jews fast, pray and ask God to pardon their sins committed during the previous year.
In Judaism Yom Kippur is also when God judges Jews and determines their destiny, deciding who will live and who will die.