Soldiers and police clashed with members of the sect, who were armed with machetes, in a low-cost housing area on the outskirts of the city on Monday, residents said.
"Overall 40 people were killed, 37 of them are (sect members), two were innocent and one member of the security forces," Adamu Abubakar, director of operations in Nigeria for the Red Cross, told Reuters.
"Right now I am inside the specialist hospital, which is where the injured were brought. Originally there were 16 but a 7-year old boy has since died," he said.
National police spokesman Emmanuel Ojukwu said calm had been restored to the city. He gave a death toll of 38.
There have been periodic bouts of religious violence in recent years in Nigeria, roughly divided into a predominantly Muslim north and Christian south, but the unrest has generally been motivated by rivalry over resources or local politics.
Residents said the sect members were thought to hold similar beliefs to those of Boko Haram, a radical Islamic group in the city of Maiduguri further north which wants a wider adoption of sharia (Islamic law) across Nigeria.
Clashes between the security forces and Boko Haram members killed hundreds of people in Maiduguri in July before the sect's leader was killed.
Nigeria is home to sub-Saharan Africa's largest Muslim population and has a strong tradition of moderate Sufi Islam. Most of the country's Muslim leaders and believers dismiss the views of sects such as Boko Haram. (For more Reuters Africa coverage and to have your say on the top issues, visit: http://af.reuters.com/ ) (Reporting by Tume Ahemba; Writing by Nick Tattersall)
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