Alejandro Toledo issued the emergency decree on Thursday, banning public gatherings. The decree also gives police and the military the right to search houses and make arrests without warrants.
The rebels killed eight policemen in an ambush on a police vehicle on patrol in the remote Huanuco region on Tuesday, about 350km northeast of Lima.
The group that led one of Latin America's bloodiest insurgencies in the 1980s and early 1990s has killed at least 19 police and military officers this year as it links up with what officials and drug experts say an increasingly lucrative drugs trade.
Jaime Antezana, an independent drugs analyst, said: "This is Peru's new armed conflict and it revolves around coca, in defense of coca and an alliance between drug traffickers and remnants of the Shining Path."
The state anti-drugs agency, DEVIDA, estimated that Peru had the capacity to produce 170 tonnes of cocaine this year, up 6% from 2004 and up by more than a quarter compared with 2003.
Fernando Hurtado, deputy head of DEVIDA, said: "Drug traffickers are becoming increasingly sophisticated ... and there are these rebel groups in league with Mexican and Colombian traffickers."
Selling the ideology
The government says that the rebels at large are no longer Maoists, "but bandits making a living out of crime".
Pedro Pablo Kuczynski, the prime minister, said: "They've sold out their ideology to make money."
Shining Path began its "popular war" in Peru by burning ballot boxes in the Andes in 1980 on the eve of the first democratic elections in 12 years.
"They've sold out their ideology to make money"
Pedro Pablo Kuczynski, the prime minister of Peru
A government truth commission in 2003 blamed Shining Path for more than half the 69,280 deaths in the rebel wars with the government during the 1980s and 1990s.
The group was defeated after Abimael Guzman, its founder, was captured, but several hundred rebels remain in the jungle and were blamed for a bomb outside the US embassy in Lima in 2002.
Today they offer protection for drug traffickers, who supply them with weapons, and say they defend poor coca farmers who say coca is a sacred crop with medicinal qualities that is central to their ancient traditions.
Peru is the world's No 2 cocaine producer after Colombia and production has risen sharply since 2003 as poor farmers increase production of coca, the drug's raw material.