Crowds demonstrating against the policy of the newly formed state of Jharkhand ransacked the exam centres and lobbed hand grenades. Two people were killed in the violence and the exams were cancelled.
The protests against the teachers' appointments is being led by a group of local people, the Jharkhand Adivasi-Moolwasi Manch, which is demanding that the government first offer jobs to locals before recruiting "outsiders".
A Manch spokesman, James Lakra, said that they would not allow the tests to go ahead until the government clarified its policy.
The cancellation is a serious blow to government attempts to improve education in this tribal area, which was previously part of Bihar, one of India's poorest and most illiterate states.
It is estimated that, of the 5.4 million children in the 6-14 age group, only 1.5m attend school. The 34,000 villages have only 16,500 primary schools - most with only two classrooms - and almost no teaching staff.
But the residents - tribes, known as the Adivasis, who have retained traditional and social customs - want a "100 per cent locals" policy to prevail, even if better-qualified outsiders apply.
They have declared that no new teachers will be appointed until their demands are met.