The mob attacked the temple overnight in Larkana city, the hometown of the Bhutto family and the stronghold of the Pakistan People's Party.
It surrounded the house of a Hindu man accused of burning the pages of the holy book, prompting police to fire warning shots and teargas shells.
A local police official said that soon after the news of the man desecrating the book spread, angry students and followers of local religious seminaries started gathering in groups and demanded the man be handed over to them.
"They set on fire the main Hindu temple in the Jinnah Bagh Chowk area which also completely gutted the adjoining dharmashala," the official said.
"Curfew has now been imposed in the area with heavy patrolling by the paramilitary rangers and police who had to baton charge and use teargas shells to disperse the mob," he said.
The Hindu man, who was accused of blasphemy, has been taken into protective custody.
According to local media reports, initial investigation indicates that the man had rented the house from a Muslim family and cleaned it before he moved in.
"He may have burned the holy book inadvertently," a policeman said.
Tensions gripped the Larkana's Jinnah Bagh and some other parts of the city after mob went berserk.
People from the area said Holi celebrations have been called off in various localities due to the security situation.
Sindh Chief Minister Syed Qaim Ali Shah directed DIG Larkana to bring the situation under control and probe the incident.