A UVF feud is understood to have led to an incident during which a shot was fired by police.
Three of four men arrested following the incident in the Donegall Road area of south Belfast on Wednesday evening have now been released.
One man remains in police custody.
The men were held after police forced a car to stop.
A shot was discharged by an officer during the incident and this has now been referred to the Police Ombudsman.
The men were held and questioned about loyalist paramilitary activity. Sources in south Belfast yesterday told the Belfast Telegraph of simmering tensions among UVF members in the area.
"Factions of the UVF in the Village have taken it upon themselves to deal with issues on the Donegall Road," one said.
"They see themselves as policing the community and have taken it upon themselves to sort out those they believe are stepping out of line."
There was outrage in September at the shooting of 24-year-old Jemma McGrath in the east of the city. The UVF was said to be behind the attack which left the young woman fighting for her life.
Police inquiries are ongoing into Wednesday night's incident.
The Police Ombudsman has also launched an investigation after the PSNI officer discharged their weapon.
It is understood to have been an accidental discharge, and nobody was injured.
Police had been responding to a telephone call which claimed a group of men were trying to enter a house, with at least one of the gang reportedly carrying a gun.
A short time later police pursued a car along the Donegall Road, cutting across it and forcing it up onto the pavement.
No weapons were recovered at the scene by police. The Donegall Road, between the City Hospital and Roden Street, was cordoned off for a time.
Ulster Unionist councillor Bob Stoker described the incident as "worrying".
"The circumstances of what happened are still unclear and I'd be reluctant to point the finger of guilt at anyone," he said.
"I'm concerned that a shot was fired, even accidentally. The Donegall Road is a very busy place and there are always plenty of people up and down it."
All discharges of police firearms in Northern Ireland are automatically referred by the Chief Constable to the Police Ombudsman's Office for investigation.
A spokesman for the watchdog said: "The Police Ombudsman's Office has appealed for witnesses to an incident during which a police officer fired a shot in south Belfast last night.
"It happened at about 9.30pm as police stopped a car and arrested four people on the Donegall Road.
"Anyone who saw what happened is asked to contact the Police Ombudsman's freephone witness appeal line, which is 0800 032 7880."
Asked whether the officer whose weapon discharged had been suspended from their duties, a PSNI spokeswoman said: "A full investigation into the incident is under way and any disciplinary action will be considered after examination of the facts."
"The circumstances of what happened are still unclear and I'd be reluctant to point the finger of guilt at anyone. I'm concerned that a shot was fired, even accidentally. The Donegall Road is a very busy place and there are always plenty of people up and down it."
Bob Stoker, UUP councillor