Security service agents backed by army and Republican Guards stormed the protest against President Ali Abdullah Saleh in Taez's Freedom Square, shooting at demonstrators and setting fire to their tents, protesters said.
"At least 20 protesters have been killed," one protest organiser said.
The four-month-old sit-in in Taez, south of Sanaa, was the longest-running protest against Saleh's rule.
Troops backed by tanks also stormed a field hospital and detained 37 of the wounded receiving treatment there, among hundreds rounded up as security forces pursued the protesters into nearby streets, medics and organisers said.
"This was a massacre. The situation is miserable. They have dragged the wounded off to detention centres from the streets," activist Bushra al-Maqtari said.
Protesters said the square had been entirely cleared in Sunday's raid, while security forces stormed a nearby hotel and arrested several journalists.
The Common Forum opposition coalition condemned the "crimes against humanity" committed by Mr Saleh's "remaining military and security forces and armed militias".
It warned the veteran president he would be "held personally responsible for his continued crimes against the people".
The clashes erupted late on Sunday outside a police station near the Freedom Square protest site as around 3000 people gathered to demand the release of a detained protester.
Police fired warning shots then fired into the crowd when the demonstrators refused to leave, a local committee of the "Youth of the Revolution" group said.
On March 18, 52 people died when regime loyalists attempted to break up a similar protest against Mr Saleh's rule in University Square in the capital Sanaa. The president declared a state of emergency after the bloodshed.
More than 200 demonstrators have been killed since the protests first erupted in late January in Yemen. Scores more have died in armed clashes between loyalist troops and dissident tribesmen.
In the south, suspected al-Qaida militants killed six Yemeni soldiers: two in Zinjibar on Monday, an army officer said, and four more in an overnight ambush of a military convoy near the city, according to a security official.
At least seven soldiers were wounded in the ambush, a medic said.
As the army fought to regain the city, one militant was reported killed by a shell which crashed near Zinjibar's museum and another wounded.
A security official said on Sunday that suspected al-Qaida gunmen had taken control of most of Zinjibar, the capital of Abyan province, in three days of fighting during which officials and medics said at least 21 people were killed.
Witnesses said aircraft were carrying out strikes on suspected al-Qaida positions east of the city yesterday, amid unconfirmed reports of naval shelling in the Zinjibar area, close to the coast.
Four suspected al-Qaida fighters were killed in overnight fighting in Zinjibar, another security source said, but a source close to the gunmen who control much of the city said only two were killed.
A leading tribal dignitary in Zinjibar, Tareq al-Fadhli, said by telephone the situation there was "catastrophic", with "corpses littering the streets, water and electricity cut off, and hospitals no longer functioning."
Many residents have fled, he said.
"The gunmen claim to be part of the "Partisans of Sharia" (Islamic law), which may be a coalition of armed groups," said Mr Fadhli, a former jihadist, adding they carried white banners bearing the same name.
He estimated their number at about 1000.
The defence ministry's 26sep.net, meanwhile, said the gunmen were believed to belong to al-Qaida, and that 10 had been captured. Ninety-six boxes of rockets were intercepted near Zinjibar, it added.
But dissident army commanders have accused Mr Saleh of surrendering the province to "terrorists".
And the Common Forum charged he had "delivered Zinjibar to groups that he has formed and armed, to continue to utilise the spectre of al-Qaida to frighten regional and international parties".