Obasanjo invoked emergency powers on Tuesday to suspend the elected governor of Plateau, where a Christian militia killed more than 200 Muslims earlier this month.
The president also issued a stern rebuke to a second governor over last week's sectarian violence in the city of Kano, which left more than 35 dead.
"The situation in Plateau State, to say the least, constitutes a challenge to our democracy. We need to take very serious action to stem the tide of what has become a near mutual genocide," Obasanjo said.
"It constitutes a grave threat to law and order and a great danger to security in Plateau State, and the neighbouring states. It is, therefore, clearly a threat to the security and unity of Nigeria," he warned.
"I hereby declare a state of emergency in Plateau State. The governor and his deputy by this declaration will go on suspension and cease to be in charge of the affairs of Plateau State for six months," he added.
The elected governor's sacking by the president was the first since Nigeria returned to civilian rule in 1999.
"We need to take very serious action to stem the tide of what has become a near mutual genocide"
Obasanjo suspended Plateau's state assembly and appointed a retired general to replace the "incompetent and lackadaisical" governor.
Under Nigeria's 1999 constitution, a state of emergency goes into effect immediately, but must be ratified by the National Assembly within two days.
For the past three years, Christians and Muslims have been fighting over farmland around the towns of Yelwa, Shendam, Wase and Langtang, about 300km east of Abuja in Nigeria's central highlands.
Hundreds of people have been killed, the slaughter of more than 200 Muslims in an attack on Yelwa on 2 May being the most recent attack.
Last week, rioting erupted in the northern city of Kano when Muslim youths targeted Christians to avenge for the Yelwa massacre.