The firing started around 1300 hours and periodic gunfire has been heard from different sides of the mosque.
Madrassa students armed with sticks and Kalashnikov rifles rushed towards some of the pickets of the Rangers, who in turn fled.
The cleric accused the government of starting the fighting and demanded the immediate withdrawal of about 1500 Rangers who surrounded the radical mosque on Friday.
While emergency has been declared in all hospitals, the government has called for police reinforcements from nearby Rawalpindi city.
The police have not cordoned off the boys' madrassa, Jamia Faridia, located less that seven km from the mosque. The roads on the sides of the mosque in central Islamabad were open for over two hours after the firing began.
Also as firing started, Rangers were seen withdrawing into the nearby streets, while the heavily-armed students took the streets.
Image: An armed radical student has a gas mask on while taking position behind a wall outside the mosque.
Also read: 'Islamabad's Lal Mosque grooming jihadis'