Social media videos shot in the Plaza Major showed injured fans and officers in body armour wielding batons.
BBC journalist Phil Mackie confirmed police used baton charges to clear parts of the square.
Earlier, Spanish police said eight Leicester fans were arrested for "causing a mess" on Tuesday night.
Footage posted online showed a group of officers being targeted with missiles and fans chanting "Gibraltar is ours" in the Plaza Major, where Leicester's fans were told they could congregate.
A witness told BBC 5 live: "There were a couple of people who probably antagonised the police, but then they took it out all these people here.
"There were people with children, they came in with batons and there was a 70-year-old man and the kids [in the way]."
Owynn Palmer-Atkin, reporting for BBC Radio Leicester, said: "There was a couple of flares that went off - blue smoke, then a bang, and that is when you heard the tone of the chanting change.
"The noise of the crowd seem to quieten and then become more of a panic.
"There was another bang and that is when the riot vans started charging across the square. I find it incredible a police van would travel that fast in a crowded square."
BBC presenter Gary Lineker, a Leicester City fan and former Foxes player, tweeted: "Just saw the footage of some Leicester fans behaving despicably in Madrid. The few idiots ruin it for the decent majority. Sickening.."
On Tuesday night, Phil Mackie said he witnessed what appeared to be an unprovoked attack on supporters.
He reported seeing police charging a group of Leicester fans walking in the city centre before three were pushed to the ground, hit with batons and bundled into the back of vans.
Police said six officers were also attacked in the overnight disturbances.
The eight fans arrested remain in custody and will appear in court on Thursday.

After losing to the West Indies in their opening match, England chased 230 to beat South Africa and recovered from 57-6 to defeat Afghanistan.
"We have a point to prove after the last game," said right-hander Root.
"We've obviously not performed at our best yet which in a way is exciting because we know that's still to come."
Victory against Sri Lanka in Delhi would secure England's place in the World Twenty20 semi-finals for just the second time since its inception in 2007.
Defeat would enable either Sri Lanka or South Africa - who face each other in the group's final match on Monday - to finish second in Group 1 and join West Indies in the last four.
Root added: "It's a must-win game on Saturday. We can win a game with ball and bat but we need to put them both together consistently. Then we can go all the way in this competition."
James Vince replaced the injured Alex Hales and was the first to fall as England lost five wickets for 15 runs against Afghanistan on Wednesday, but Hales could return to play in Delhi on Saturday.
"Alex Hales is improving with his back and he's feeling more comfortable. He had a training session today (Friday) but we will have to see how he is tomorrow (Saturday) when he gets up," said Root.
Defending champions Sri Lanka have not played since Sunday when they where defeated by the West Indies, and have had one fewer match than England. In their opening game they recovered from a poor start to beat Afghanistan.
"It was a really good break. We discussed what went wrong in the two games. We need to execute our plans and the guys are looking forward to the match,"  said wicketkeeper Dinesh Chandimal.
"We are struggling with our batting, especially the middle order, but we are working hard in practice and looking forward to do well."
Ex-England spinner Vic Marks on Test Match Special:
"England haven't put together the perfect match yet. England did beat Sri Lanka in the last T20, the only team to do so when they won it.
"That was the match where Alex Hales smashed them for 99. England will want him to be fit to play.
"Sri Lanka are not as fearsome as they were because they have lost key players, but they still have quality spinners."
Leicester City fans were involved in further clashes with Spanish police ahead of their Champions League tie against Atletico Madrid.
[NEXT_CONCEPT]
Joe Root says England are yet to play to their full potential as the side prepares for a "must-win" game against Sri Lanka at the World Twenty20.