The students were protesting on Tuesday after being denied a permit to hold a demonstration outside the West Papuan capital Manokwari.
A local TV station shown footage of protestors hurling rocks at police and dozens of officers firing shots back at the demonstrators.
There are scenes of police smashing up protestors' bikes and dragging people away.
West Papua Deputy Police Chief, Brigadier General Paulus Waterpaw, says police attempted to disperse the unauthorised protest by firing into the air, but the demonstrators then turned on them with rocks, prompting police to fire back.
Mr Waterpaw says four people from each side of the clash are in hospital with injuries, and he regrets the situation became violent.
The leader of National Committee for West Papua, Victor Yeimo, told Radio Australia's Indonesian Service at least 10 people are injured, some of them with gunshot wound.
Mr Yeimo says the peaceful rally only turned violent after police tried to disperse the protesters by force.
Yeimo says police have also arrested activists in other cities in Papua, including Sorong, Fak Fak, Jayapura, Timika, and Biak.
Andreas Harsano, from Human Rights Watch's Indonesian division, told Radio Australia's Connect Asia the rally in Manokwari was specifically in support of the International Parliamentarians for Papua meeting in the UK.
Mr Harsano says students are demanding that members of the London-based solidarity group be allowed to visit Papua.
"Since 1963 when Indonesia took over West Papua...you have to get approval - a special visa - to go to Papua," he said.
"They want the restriction against foreigners (to) be lifted because it is almost 50 years and Papua is still isolated."
The rally was the first major unrest since Indonesian police shot dead leading pro-independence figure Mako Tabuni in June, sparking a wave of violent protests.
Australia's Attorney-General, Nicola Roxon, has told Radio Australia that any cases of alleged abuse by security forces must be properly investigated.
Ms Roxon says Australia's ambassador and Foreign Affairs department is looking into the latest reports of the West Papua violence.
"Any incidence of conflict and violence in the Papuan province is of a real concern both to us and to the Indonesian government," Ms Roxon said.
"Australia is very firmly committed to making sure that any abuses or any alleged abuses by security forces in Papua will be properly investigated and punished."