Waves of up to 6.6ft high swept through Palu on Sulawesi island, not long after authorities had lifted a tsunami warning.
Video on social media shows people screaming and fleeing in panic and a mosque amongst the buildings damaged.
According to officials, five deaths have been reported, but it is not clear if those were as a result of the tsunami.
Last month, a series of earthquakes struck the Indonesian island of Lombok, killing hundreds of people – the biggest on August 5 killed more than 460.
The earthquake hit just off central Sulawesi at a depth of 6.2 miles just before 18:00 local time, the US Geological Survey said.
A tsunami warning was issued, but lifted within the hour.
The dramatic video footage of the tsunami hitting Palu shows the high waves sweeping away several buildings and then the large tilted mosque in the town, about 55 miles from the quake’s epicenter.
Dwikorita Karnawati, head of Indonesia’s meteorology and geophysics agency, BMKG, said the tsunami had receded.
The 2004 tsunami triggered by an earthquake off the Indonesian island of Sumatra killed 226,000 across the Indian Ocean, including more than 120,000 in Indonesia.
Indonesia is prone to earthquakes because it lies on the Ring of Fire – the line of frequent quakes and volcanic eruptions that circles virtually the entire Pacific rim.
More than half of the world’s active volcanoes above sea level are part of the ring.
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