The rival groups, belonging to Marathi Sahi area on the outskirts of Kodala town and adjoining J Sachina village, have been at loggerheads for a long time over old disputes.
The clash took place after some houses in Marathi Sahi area were allegedly damaged when armed mob from J Sachina village set them ablaze this morning, police said.
As both the groups fought a pitched battle using sticks, iron rods, daggers and swords, two persons were stabbed to death, they said.
The authorities ordered prohibitory orders under section 144 of CrPC and night curfew in the area, Ganjam District Collector Krishan Kumar said.
Sub-divisional Police Officer (SDPO) P K Jali and Inspector in-Charge of Kodala, Paramananda Sahu have been placed under suspension for dereliction of duty, while the state government ordered a thorough probe into the incident by the Revenue Divisional Commissioner, southern division, sources in the chief minister`s office said.
Financial assistance of Rs two lakh each was announced for the families of the deceased, while Rs 50,000 each would be provided for totally destroyed houses and Rs 20,000 each for partially damaged shelters, they said.
"We have deployed adequate force in the area where efforts are on to restore normalcy quickly," Ganjam SP Rajesh Pandit said.