Police said trouble began after some Christian youths protested against the picture of Jesus holding a beer can and a cigarette, which appeared in some newspapers.
"In most of the places the protest was peaceful but in Batala Town of Gurdaspur the situation took turn for the worst, when some youth demanded the downing of the shutters in Hindu dominated market," Evangelical Fellowship of India (EFI) reported.
"Resistance on the part of these shopkeepers led to clashes between the two communities. The violence gradually spread to the entire city when Bajrang Dal and Shiv Sena came out on the roads with weapons and indulged in arson, looting and violence."
The EFI said two churches - belonging to the Church of North in India and The Salvation Army - had been vandalised, while the priests in charge had "brutally thrashed" and their houses ransacked.
Following the vandalism, an indefinite curfew was imposed in Batala and over 2,000 police were deployed to keep the peace.
Meanwhile, the printing press where the controversial poster was printed has been sealed and the owner arrested.
"Culprits behind the blasphemous act of showing disrespect to the image of Lord Jesus have been arrested by the special team of Punjab police," IANS quoted state Deputy Chief Minister Sukhbir Singh Badal as saying.
He added: "We appeal to the people of Punjab to maintain peace and harmony in the state. A special security group is interrogating the culprits and they would investigate their motive behind this act."
According to sources, the offensive poster was first displayed on a Ram Navmi hoarding in Jalandhar where a religious procession was to be taken out. While portraying all deities, the poster depicted Jesus with a cigarette and a beer can.
It follows controversy in the state of Meghalaya, where a similar image was printed in a primary school textbook.
The New Delhi-based Skyline Publications that published the textbook was subsequently banned in all Catholic schools and a case registered against the publisher.
The National Council of Churches in India (NCCI) condemned the act and demanded the publisher to offer an unconditional apology for “hurting the sentiments of Christians in the country”.