* Government blocks Facebook, other social media for three days
* Curfew imposed in central district to prevent violence
* Severed head of youth found in Muslim district of capital (Adds grenade attack, death, prime minister's statement)
By Shihar Aneez and Ranga Sirilal
COLOMBO, March 7 (Reuters) - A grenade blast killed one person in further violence between majority Buddhist Sinhalese and minority Muslims in Sri Lanka on Wednesday despite the government's blocking of social messaging networks in efforts to halt the bloodshed.
The South Asian country has been rocked by communal clashes in its central highlands since Sunday following attacks on Muslims by nationalist Sinhalese crowds.
Communal tensions have grown over the past year with some hardline Buddhist groups accusing Muslims of forcing people to convert to Islam and vandalising Buddhist archaeological sites. Muslim groups deny these allegations.
Some Buddhist nationalists have also protested against the presence in Sri Lanka of Muslim Rohingya asylum seekers from mostly Buddhist Myanmar, where Buddhist nationalism has also been on the rise.
Police declared a curfew until 4 p.m. (1130 GMT) Thursday in the central highlands district of Kandy, epicentre of the violence following the death of a Buddhist youth after an altercation with a group of Muslims.
Buddhist mobs attacked mosques and businesses belonging to Muslims overnight, residents told Reuters on Wednesday, even after President Maithripala Sirisena decreed an emergency for seven days to curb the violence.
Police spokesman Ruwan Gunasekara said there had been several disturbances throughout Tuesday night in the Kandy area, renowned for its tea plantations and scenic hills.
"One person was killed and three were injured during the day after a hand grenade exploded," Gunasekara told Reuters, without elaborating. Police have arrested seven people and three police officers were injured in the incidents, he said.
The severed head of a youth was found in a mainly Muslim area in the capital Colombo, adding to tensions, residents said. Police said they were investigating.
Some of the violence has been instigated by Facebook postings that threatened more attacks on Muslims, the government said. On Wednesday, it said Facebook, Viber and Whatsapp would be blocked across Sri Lanka for three days.
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.
On a visit to Kandy, President Maithripala Sirisena urged religious leaders to do more to rebuild inter-communal peace.
Muslims in Colombo said they fear for the safety of relatives living in Kandy.
Mohamed Khan, a 71-year-old worker in a soap factory in Colombo, said his relatives in Kandy were in hiding. "They say the police and military are...not taking any action," he said.
Analysts said Muslim-owned businesses were being targeted as many Sinhalese believe that the minority group holds disproportionate economic power.
Sri Lanka is still healing from a 26-year civil war with Tamil separatist rebels that was plagued by atrocities and ended in 2009. Sinhalese comprise around 70 percent of the South Asian nation's 21 million population, ethnic Tamils - who are mainly Hindu - about 13 percent, and Muslims around 9 percent.
U.N. human rights chief Zeid Ra'ad al-Hussein said he was alarmed by recurring episodes of violence against ethnic and religious minorities in Sri Lanka and wanted accountability.
"There should be no impunity, either for the incitement that led to the attacks, or the attacks themselves," he said in a speech to the U.N. Human Rights Council in Geneva.
The U.S. State Department issued a security alert warning of the possibility of further unrest in Kandy.
Tourism, one of the foreign exchange mainstays of Sri Lanka's $81 billion economy, could take a serious hit from the violence as Kandy is a prime destination for foreign travellers.
Kandy is located in the heart of the Indian Ocean island nation's tea-growing region but an Indian trader said the crisis was unlikely to affect global tea markets in the near term.
"This will delay shipments, but won't have any impact on global prices, as Kenya and India have ample supplies to substitute. If supplies remain disrupted for more than a month, then prices could go up," said a tea broker in the eastern Indian city of Kolkata.
Sri Lanka is the world's third biggest tea exporter. (Additional reporting by Stephanie Ulmer-Nebehay in Geneva and Rajendra Jadhav in Mumbai writing by Sanjeev Miglani editing by Mark Heinrich)