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(Reuters) - Ongoing tensions over how to handle social inequality in San Francisco sparked an a rare outburst among venture capitalists Monday.

Facebook Inc executive-turned-venture capitalist Chamath Palihapitiya called for San Francisco Mayor Ed Lee to resign due to a "very stupid city government," spurring fellow venture capitalist Ron Conway to jump to his feet and start yelling.

"How dare you!" shouted Conway from the rear of the auditorium at the end of a discussion on inequality at Bloomberg's Next Big Thing conference, held at an exclusive resort just across the Golden Gate Bridge from San Francisco.

The city's role in bolstering technology, including giving tax breaks to Twitter Inc and other companies, has come under fire in recent months as complaints rise about income inequality. Many city residents blame a growing wealth gap on large technology industry salaries.

On Monday, disagreements over who to hold responsible came to a head as Palihapitiya told a roomful of executives that the city did not focus enough on its problems and blamed a "really, really, really broken political system."

Asked twice by moderator Emily Chang if the tech industry should take any responsibility, Palihapitiya first said the industry's "spillover effect" should be weighed. One study from the University of California, Berkeley, concludes that each San Francisco technology job creates five more jobs.

"Having these expectations, it's kind of a false trade off," he then said. Palihapitiya lives in Palo Alto, in the heart of Silicon Valley.

By contrast, Conway, who helped elect Lee, lives in San Francisco and leads Sf.citi, a group of technology companies that is trying to tackle problems such as affordable housing and job creation.

"He is doing something," Conway shouted at Palihapitiya, referring to the mayor who Palihapitiya had said led a group of "ineffective or dumb" workers in city government. A spokeswoman for the mayor did not respond to a request for comment.

Until Monday, such outbursts remained the province of demonstrators, who in recent months have taken to the streets and blocked commuter buses from moving. The buses, operated by companies such as Facebook and Google, ferry workers who live in San Francisco to jobs at companies 30 or 40 miles away in Silicon Valley.

Palihapitiya, who grew up in Canada in a family of Sri Lankan immigrants, said those protests "weren't cool."

He also called for the city to take a 1 percent equity stake in any technology company in return for city incentives such as tax breaks.

Palihapitiya is a partial owner of the Golden State Warriors basketball team, whose plan to build a new arena on the site of two city piers was derailed earlier this year, partly because of regulatory challenges.

"If we had waited for the city, it would have been like waiting for Godot," Palihapitiya said, referring to the never-arriving character in the existential novel by Samuel Beckett.

Conway said the mayor was working on the city's problems, including creating more affordable housing.

"Maybe you could donate some," he suggested to Palihapitiya.

(Reporting by Sarah McBride; Editing by Richard Chang)