AHMEDABAD, India (Reuters) - Two people were killed in clashes between Hindus and Muslims in India's volatile state of Gujarat ahead of the second anniversary on Friday of the country's worst religious riots in a decade.

The violence late on Thursday in the industrial town of Baroda was triggered by a dispute over the route of a Muslim procession next week, a police officer said.

"The situation is peaceful now. But police are on high alert to prevent fresh violence as today is also the second anniversary of the Godhra train burning."

About a thousand people, most of them Muslims, were killed in Gujarat in February 2002 after a suspected Muslim mob set ablaze a train in the town of Godhra, killing 59 Hindu activists. But non-government groups say the riot toll was more than 2,500.

On Thursday, a Muslim youth was killed in police firing and a Hindu died of stab wounds, police said. Five people were hurt when rival gangs attacked each other with stones and acid.

Police across the state are on high alert as the right-wing Vishwa Hindu Parishad organisation holds prayers on the anniversary.

"We are not taking any chances. Any signs of trouble will be strictly dealt with," a police official said.

Political analysts say religious tension could increase in the state in the run-up to a general election expected in April.

Critics accuse the Hindu nationalist Bharatiya Janata Party, which controls the federal coalition and the state government in Gujarat, of a deep-seated bias against Muslims who make up 12 percent of India's population of more than one billion.

The BJP denies any bias but says it is opposed to appeasement of any community.