A spate of violence involving Buddhists and Muslims has left 17 people dead and hundreds of properties damaged.
Trouble flared after the murder of a Buddhist woman last month, followed by an attack on a bus carrying Muslims.
Officials announced a curfew in four towns in the state earlier, expressing concerns about further clashes.
A state of emergency essentially allows the military to take over administrative control of the region.
State television said the order was in response to increasing "unrest and terrorist attacks" and "intended to restore security and stability to the people immediately".
President Thein Sein said the sectarian violence could put the country's moves towards democracy in danger.
"If we put racial and religious issues at the forefront, if we put the never-ending hatred, desire for revenge and anarchic actions at the forefront, and if we continue to retaliate and terrorise and kill each other, there's a danger that (the troubles) could multiply and move beyond Rakhine," he said.
"If this happens, the general public should be aware that the country's stability and peace, democratisation process and development, which are only in transition right now, could be severely affected and much would be lost."
A nominally civilian government was elected in 2010 and, in April this year, opposition politicians led by Aung San Suu Kyi entered Burma's parliament following historic by-elections.
However, the government is still dominated by the military and concerns over political repression and human rights abuses continue.
Source: BBC News
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