A bar manager from New Zealand has appeared before a Myanmar court accused of insulting religion by using an image of the Buddha to trail a cheap drinks night.

The offending poster, which featured a psychedelic mock-up of the Buddha wearing DJ headphones, has prompted outcry in the predominantly Buddhist country, which is grappling with surging religious nationalism.

Around a dozen monks and hardline Buddhists gathered outside the Yangon court shortly after Philip Blackwood, 32, was led into the building in handcuffs.

Around two dozen riot police armed with batons were standing by.

It was Blackwood's first court appearance since he was denied bail last week along with Myanmar nationals Tun Thurein, 40, who owned the bar, and manager Htut Ko Ko Lwin, 26.

The trio face possible jail terms if found guilty of breaching the Religion Act with the contentious poster - which was quickly withdrawn from the VGastro bar's Facebook page.

Under the act, anyone who attempts to insult, destroy or damage any religion can be punished by a maximum of two years in jail, with another two-year penalty for those who try to insult religion through the written word.

Myanmar's legal system remains opaque despite reforms since the end of full junta rule in 2011 and it was unclear when the court was due to rule on the case.

Some of the bystanders outside the court wore T-shirts printed with the Buddhist nationalists' "969" logo.

Myanmar is wrestling with growing Buddhist nationalist sentiment driven by extremist monks, who have urged boycotts of Muslim shops and proposed a raft of deeply controversial laws to restrict religious freedom.

Their rise has accompanied several bouts of religious violence between Muslims and Buddhists, mainly in Rakhine State.