Muslim groups deny these allegations.
"We made a decision to take strong action to control the situation and to deal strongly with all wrong doers", senior minister Rauff Hakeem, who is also the leader of the main Muslim party Sri Lanka Muslim Congress (SLMC), told reporters.
The attack took place following the death of a Sinhalese youth who had allegedly been assaulted by a Muslim mob, a police officer who declined to be named told Reuters.
Three special police teams, comprising three Deputy Inspector Generals of Police and three Superintendents of Police, have been deployed in Kandy on the instructions of the Inspector General of Police (IGP) Pujith Jayasundara, the police spokesman said.
Several houses and business establishments in the district, belonging to minority Muslim community, were burnt on Monday while the body of a young man was found inside a burnt house today.
Some people were instigating violence through Facebook, the government said, warning of tough action against them.
This has been done to prevent spread of false information, the government spokesperson said. "This is clearly hate crime".
The crisis spurred opposition parties to shelve a no- confidence motion against Prime Minister Ranil Wickremesinghe for alleged mismanagement of the economy that was originally set to be filed on Monday.
Following the incidents of violence, President Maithripala Sirisena yesterday declared a state of emergency and deployed the police and military to prevent further violence.
"The situation in picture is Kandy and not Colombo".
Mohamed Khan, a 71-year-old worker in a soap factory in Colombo, said his relatives in Kandy were in hiding.
Police and some residents said Sinhalese owned properties were also attacked.
The government ended a full-blown 26-year civil war by defeating mostly Tamil Tiger rebels in 2009, with claims of atrocities on both sides.
Sri Lanka has always been divided between the majority Sinhalese, who are overwhelmingly Buddhist, and minority Tamils who are Hindu, Muslim and Christian.
"While it is positive that the government wishes to prevent further violence, any steps taken to address the problem, however, must meet Sri Lanka's obligations under global human rights law, including the absolute prohibition on torture, unfair trials and arbitrary detention", said Biraj Patnaik, the group's South Asia director. He will meet religious leaders there this week, a United Nations spokesperson said.
"Access to certain social media sites and messaging platforms will be restricted with immediate effect until further notice", Sri Lanka's largest mobile phone provider Dialog said in a statement.
Details of the emergency decree were not immediately announced, and it was unclear how it would affect life on the South Asian island nation, where Buddhist-Muslim tensions have flared in recent years with the growth of extremist Buddhist organizations.
"This will delay shipments, but won't have any impact on global prices, as Kenya and India have ample supplies to substitute".