SHANGHAI—The government of an eastern Chinese town that specializes in making children's wear said Friday it will retract a tax that sparked riots this week, an effort to quell local discontent that had prompted authorities to fill the town's streets with police.

A dispute over levies that mostly affected migrant workers at small workshops sparked violence this week in the Zhejiang province township of Zhili, 80 miles west of Shanghai in the city of Huzhou. For a second straight night Friday, officials were telling residents...