The mineral-rich but impoverished nation has descended into chaos since mostly Muslim Seleka rebels from the north seized the capital Bangui in March, ousting President Francois Bozize.
The new transitional government's failure to stem the violence has prompted the UN Security Council to consider intervening to restore order.
Local self-defence militias, known as "anti-balaka" or anti-machetes, attacked a Seleka position in Gaga, around 150 miles north-west of Bangui, killing four ex-rebels before attacking Muslim civilians.
The Seleka fighters retaliated against Christian civilians in the village, witnesses said. Seleka gunmen, many of them from neighbouring Chad and Sudan, have repeatedly been accused of desecrating churches and terrorising Christian communities.
Judicael Kama, a gendarme in the nearby town of Yaloke, said: "We are waiting for reinforcements in order to go there but from the accounts we've gathered we believe there are more than 60 dead."
Raymond Kitivo, who was wounded in the attack, said: "The Seleka fighters went door to door. It was total terror."