Shops in the town were closed as hundreds of people poured into the streets to applaud the monks from outside the gates, one resident said.
"The security forces outside the monastery are too afraid to go near the crowd. They won't even show their walkie-talkies," said another.
"I fully support the monks. They were just peacefully praying for the people. The monks are absolutely right," he said.
"I'm surprised that these security people would dare to harm Buddhist monks in this country."
A number of monks were reportedly injured when soldiers fired warning shots into the air to disperse hundreds of monks protesting against the government's economic policies.
The incident was the first reported case of guns being used to break up pro-democracy protests since the government imposed a steep hike in fuel prices three weeks ago.
The price increase has triggered rare public protests in Myanmar, beginning in the biggest city Yangon and spreading to other parts of the country.
According to the US-funded Radio Free Asia (RFA), the protest in Pakokku, about 500km north of Yangon, lasted about three hours before soldiers moved in to break it up.
Reports on RFA and from exiled Myanmar pro-democracy groups said between 300 and 600 monks joined the protest, some of them carrying placards protesting high prices and calling for political prisoners to be released.
Scores of activists, many of them former student leaders from the 1988 pro-democracy uprising, have been detained for their involvement in the protests against the fuel price rises.
Monks were at the forefront of protests against British colonialism and the the 1988 uprising but have been kept under tight control in recent years.
News reports from dissident organisations suggest the generals who first seized power in Myanmar in 1962 have been pressing the heads of Mandalay's monasteries not to become involved in the current protests.
"They seem to be more nervous. Once the monks in Mandalay start to rise, they won't be able to control it," a Yangon-based politician said earlier this week.