Joseph Pararajasingham, 71, a Tamil MP, was shot in the chest during the service on Sunday at Saint Mary's church in Batticaloa, 303km east of Colombo, a witness said.
The witness, who declined to be named, said: "There was panic after the shots were fired in front of a congregation of hundreds. People generally know who did it but they are afraid to talk."
A police official said: "There could have been one or more gunmen and there was an exchange of fire with the guards of the VIP."
Eight people wounded during in the attack were admitted to the main hospital in Batticaloa.
Pararajasingham's wife, Sugunam, also suffered shotgun injuries, police said.
In the island's north, meanwhile, suspected Tiger rebels lobbed grenades at two army checkpoints on Sunday, wounding eight soldiers, a local military official said.
No arrests had been made in connection with the MP's assassination, but police were carrying out a search of the surrounding area, the police official said when contacted by telephone.
The official said: "A search operation was carried out shortly after the attack and we have stepped up security. There is an uneasy calm now. Shops are open and there is public transport."
The EU has pressured the Tamil
Tigers to renounce violence
The killing came hours after Sri Lanka's international backers expressed "deep concern" over the escalation of violence that has claimed the lives of more than 60 people this month.
"Sri Lanka faces a crucial choice today between mounting violence and reinvigorating peace," the quartet known as the Co-Chairs said in a statement on Saturday after meeting with Tiger rebels.
"The Sri Lankan people clearly want peace - it would be a tragic step backwards if their desire was not heeded."
Diplomats from the Co-Chairs - the United States, European Union, Japan and Norway - said there was an urgent need for the rebel Liberation Tigers of Tamil Eelam (LTTE) to agree to holding talks on salvaging their troubled truce.
There was no immediate claim of responsibility for Sunday's assassination, which underlined the worsening security situation in Sri Lanka's troubled north and east.
Five people were killed in clashes on Saturday, a day after 18 others, including 15 sailors, were killed in suspected Tamil rebel attacks.
Pararajasingham, a key figure in the Tamil National Alliance (TNA) party, entered parliament in 1990 replacing Sam Thambimuttu, who was killed by suspected Tiger fighters.
Seats in parliament
Last year the TNA aligned itself with the LTTE.
With 22 seats in the national parliament, the party is virtually a proxy of the guerrillas.However, Pararajasingham was never regarded as a fighter but was seen as a moderate.
He was a member of a TNA team that held talks with Mahinda Rajapakse, Sri Lanka's president, last week.