Bouts of anti-Muslim violence have left scores dead across the country since 2012 and the febrile atmosphere poses serious challenges for Aung San Suu Kyi's new government.
The violence erupted on Thursday afternoon as a mob of around 200 Buddhists rampaged through a Muslim area of Thuye Tha Mein village in Bago province following an argument between neighbours over the building of a Muslim school.
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"It started when a Muslim man and a Buddhist woman started to argue and then people came to fight him," Hla Tint, the village administrator, told AFP.
"Parts of the mosque were destroyed... they also destroyed the fence of the Muslim cemetery," he added.
Around 70 Muslims, including children, sought shelter in a police station overnight on Thursday, he said, adding there were no serious injuries and peace had been restored.
Police and the secretary of the mosque confirmed the damage, while a Muslim resident told AFP his community of around 150 people is now living in fear.
"We had to hide as some people were threatening to kill Muslims. The situation has never been like this before," Tin Shwe OO, 29, told AFP, adding his family stayed at the small police station overnight.
"I do not dare to stay at my house. For the safety of my family, I want to stay somewhere else for about a week or so."
Outbreaks of deadly violence have roiled the country threatening to unpick democratic gains since the army began loosening its stranglehold on the country in 2011.
The worst violence struck central Myanmar and western Rakhine State which is home to the stateless Rohingya Muslim minority, tens of thousands of whom still languish in displacement camps after rioting.
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Buddhist nationalists vigorously oppose moves to recognise the Rohingya as an official minority group, instead labelling them "Bengali" -- shorthand for illegal migrants from the border with Bangladesh.
Democracy champion Suu Kyi, who is currently visiting Thailand, has come under fire for failing to speak up for the Rohingya -- although she recently caused surprise by using the incendiary term during a visit to Myanmar by America's top diplomat.
Religious tensions pose a unique challenge to the new government and to Suu Kyi, a Nobel laureate once garlanded for her fight for rights for all.
Her party is dominated by ethnic Bamar Buddhists and did not field any Muslim MPs in the election last year that drove it to power.
Hardline monks -- known as the Ma Ba Tha -- are accused of stoking violence and tensions with hate speech.
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