Soldiers and police were upholding a curfew in Kandy after mobs set fire to shops and a mosque - resulting in the body of a Muslim man being found in the ashes of a burnt building.
President Maithripala Sirisena made the declaration, saying security services had been empowered to deal with “criminal elements” and to restore normality on the island.
Communal tensions have been bubbling for the past year, with some Buddhist hardline groups such as the Bodu Bala Sena (BBS) accusing Muslims of forcing people to convert to Islam and vandalising religious sites.
BBS activists have also protested against the presence in Sri Lanka of Muslim Rohingya refugees from Burma, also known as Myanmar, where Buddhist nationalism has also seen a recent surge.
Sri Lanka's Special Task Force members perform at a rescue demonstration during the 35th anniversary in Kalutara
Najah Mohamed, secretary of the United National Front for Good Governance - a pan-ethnic and religious political party - said: "Violent BBS mobs manipulated the situation to fuel attacks against Muslims in an unprecedented way and started attacking people.
“In the afternoon the police and curfew were here, but there are still rising under-reported incidents taking place”, he told Al Jazeera.
Police spokesman Ruwan Gunasekera said: "The curfew was imposed to control the situation in the area.” A government statement added that officers were placed on high alert in Kandy to ensure the "situation does not spiral into inter-communal conflagration".
The Indian cricket team is currently in Sri Lanka for a tri-nation series along with Bangladesh, but Dayasiri Jayasekara, the sports minister, said there was no question of cancelling any matches at the moment.
However, a cabinet meeting decided "to take stern action against people who are instigating violence through Facebook," he said, referring to incendiary postings online.
Muslim neighbourhoods were badly damaged in the most recent violence in Kandy this week, triggered by the death of a Buddhist man during a riot last week.
The Sinhalese are a mainly Buddhist ethnic group making up nearly three-quarters of Sri Lanka's 21 million people. Muslims are around 10% of its population.