Swathes of Meiktila, located 130 kilometres (80 miles) north of the capital Naypyidaw, have been reduced to ashes as authorities struggled to establish control after three days of clashes and arson.
“At least 20 people have been killed. We estimate that it could be higher but it is also difficult for us to gather all the figures,” a police officer who did not want to be named told AFP on Friday.
The president’s office said the state of emergency would enable the military to help restore order.
The situation was extremely tense in Meiktila with groups of men — including Buddhist monks — armed with knives and sticks prowling the streets. Many of the town’s Muslim residents have fled their homes.
A journalist saw the incinerated remains of two victims on a roadside, just one of several reports of bodies in the town, as flames raged from torched mosques and houses while other buildings smouldered unattended.
“The situation is getting worse,” a local resident said. “People are destroying buildings. Many people have been killed. We are scared and trying to stay safe at home.”
A group of reporters were stopped at knife-point by a gang of young men and monks and forced to hand over their camera memory cards, according to one of the journalists.
It is the worst communal violence since a wave of clashes between Buddhists and Muslims in the western state of Rakhine last year that left at least 180 people dead and more than 110,000 displaced.
A local lawmaker said that about 25 people had been killed in Meiktila, where more than one-third of the population of about 80,000 people is Muslim, but it was not possible to verify his figures.
“The situation is not good… although the government has said everything is under control,” parliamentarian Win Htein, of the opposition National League for Democracy party, told AFP.
He said hundreds of Muslims had taken shelter at a football ground and police compound while Buddhists had sought sanctuary in monasteries.
As international alarm grew, a senior UN official said authorities needed to act “to prevent further loss of life or spread of violence” in the Buddhist-majority nation.
“Religious leaders and other community leaders must also publicly call on their followers to abjure violence, respect the law and promote peace,” Vijay Nambiar, special advisor to UN leader Ban Ki-Moon, said in a statement.
US State Department spokeswoman Victoria Nuland on Friday reiterated Washington’s concerns over the violence and said the United States was “encouraging all sides to call for calm, to foster dialogue, tolerance and mutual respect”.
“That’s the right way to approach this,” Nuland said of the state of emergency and extra security forces in the town. “They are working, and a number of community leaders and political leaders are also working, to restore calm”.
The violence comes as Myanmar struggles with worsening tensions between Muslims and Buddhists that have marred international optimism over dramatic political reforms since the end of military rule two years ago.
A local police officer said an order had been given on Thursday to shoot rioters below the waist if needed to quell the violence, which apparently began with a row in a Muslim-owned gold shop that turned into a mass street brawl.
“There is a real risk of further violence unless the authorities take immediate steps to protect those at risk,” said Isabelle Arradon, Amnesty International’s deputy Asia Pacific director.
Myanmar’s Muslims — largely of Indian, Chinese and Bangladeshi descent — account for an estimated four percent of the population of roughly 60 million, although the country has not conducted a census in three decades.
Sectarian unrest has occasionally broken out in the past in some areas across the country, with Rakhine state a flashpoint for the tensions.
Since violence broke out there last year, thousands of Muslim Rohingya — including a growing number of women and children — have fled the conflict in rickety boats, many heading for Malaysia.