At least 30 people are said to be in critical conditions.
There were reports that snipers had also shot at protesters during a march in the country's fourth-largest city, Hudaida, on the Red Sea.
The violence follows weeks of protests in cities across the country calling for the president to stand down.
President Ali Abdullah Saleh, who has ruled the country for 32 years, has signalled that he has no plans to leave.
The violence in Taiz broke out when protesters began marching toward Freedom Square - the focal point of protests and where demonstrators have been camped out, according to Reuters.
When the march passed the governor's headquarters, troops blocked the procession and clashes broke out.
According to Bushra al-Maqtara, an opposition activitist, troops on nearby rooftops then opened fire using live ammunition.
There is a very heavy security presence in Taiz.
Tanks and armoured vehicles are blocking entrances to the city and surrounding Freedom Square, containing the thousands in the city's protest camp and arresting anyone who tries to leave.
A doctor in a clinic set up by protesters in Freedom Square, Zakariya Abdul-Qader, told Reuters that some of those who had been shot had head and chest injuries.
The march in the port city of Hudaida was organised in protest at the crackdown in Taiz over the weekend, which reportedly left at least two people dead and hundreds wounded.
In Hudaida, police fired live rounds and tear gas at demonstrators who left in the early hours of Monday morning to attempt to march on a presidential palace.
Doctors at Hudaida hospital said nine people had been shot, 350 had inhaled tear gas and a further 50 had been hit by stones, Reuters reports.
"They suddenly gathered around the province's administrative building and headed to the presidential palace, but police stopped them by firing gunshots in the air and using tear gas. I saw a lot of plainclothes police attack them too," an unnamed witness told the news agency.
A BBC correspondent in the country, who cannot be named for security reasons, says President Saleh is under immense pressure: he has lost allies, Yemen's army is split, the government has lost control of entire areas of the country and the economy is collapsing.
On Saturday, the opposition coalition, Common Forum, called on the president to hand over power to his deputy, Vice-President Abdu Rabu Hadi.
Common Forum, which includes the five biggest opposition groups in Yemen, offered a five-point plan for the handover:
- President Saleh resigns and is replaced by Mr Hadi
- Mr Hadi announces a restructuring of the security forces to make them accountable to the government
- An interim government is created based on national reconciliation
- A new electoral commission is established
- Civil liberties are boosted and an investigation is launched into the killing of protesters
Officials have said they have not yet received a copy of the plan - but speaking at a meeting in Sanaa with representatives from Taiz Province on Sunday, President Saleh called on Common Forum to "end the crisis through calling off protests and removing roadblocks".
Any transition, he said, would have to be made "through constitutional ways".