The ban highlights the lingering limits on free speech in the former junta-run country, despite its new civilian government led by democracy champion Aung San Suu Kyi.
The Austrian-directed film, "Twilight Over Burma: My Life as a Shan Princess," is set in mid-20th century Myanmar. It tells the true story of an Austrian woman and her marriage to a Shan prince who was arrested in the wake of the 1962 military coup before dying in mysterious circumstances.
"We were worried and afraid that unnecessary problems could arise because of this (film) while we are working on achieving national reconciliation," said Thida Tin, deputy chairman of the Ministry of Information's 15-member film review committee.
She told AFP the board was concerned about ruffling feathers while Suu Kyi's administration prepares for a major peace dialogue with ethnic rebel groups, who have fought lengthy civil wars with the national army and accuse it of rampant rights abuses.
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The censorship will come as a disappointment to many in Myanmar's budding film community, where there were hopes that Suu Kyi's leadership would usher in a new era of artistic freedom.
"It is the first time in four years one of our films didn't pass the censorship committee," the festival's founder, Min Htin Ko Ko Gyi, told AFP.
Under the junta all books, films and news reports were vetted for content considered inflammatory or damaging to the regime.
But criticism of the army remains a sensitive subject as it is still a powerful presence in Myanmar, with control over key ministries and a quarter of parliament seats.