The Myanmar Herald Journal, renowned for its criticism of the government and ministers in the former junta-run country, was accused of having "tarnished the image and rights" of President Thein Sein, according to a statement from the information ministry published in state-backed media.
The decision to sue the paper, which authorities said followed a process of mediation by the interim press council, comes as media freedoms fall under the spotlight before a visit by US President Barack Obama next week.
According to the information ministry, the Myanmar Herald Journal ran an interview in which the subject described the president's words as "gibberish, irrational, cheap and inconsistent... Completely nonsensical, absurd and insane".
Thein Sein's quasi-civilian government, which came to power in 2011 at the end of outright military rule, has ushered in sweeping press reforms, including the release of jailed journalists and scrapping draconian pre-publication censorship, which once applied to everything from fairy tales to the lottery.
But relations between the government and the often rambunctious press have worsened in recent months, with prosecutions against the media that have seen several journalists handed prison terms.
The United States last week called on Myanmar to conduct a "credible and transparent investigation" into the killing.
Local police in the town of Kyaikmaraw in Mon State on Tuesday confirmed they would allow Aung Naing's wife to exhume the body, although it was unclear if an independent autopsy would be permitted.
Authorities said they had sought an apology from the Myanmar Herald Journal under a complaints resolution process set up to try to avoid court proceedings against reporters.
Myanmar's press council said the ministry was likely to pursue a defamation suit against the paper.
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