The recent surge in cutaneous leishmaniasis (CL) in Sri Lanka has rendered clinical diagnosis difficult; thus, laboratory confirmation is indispensable. A modified (two novel inner primers to detect CL caused by Leishmania donovani) nested Internal Transcribed Spacer-1 (ITS1) PCR-Restriction Fragment Length Polymorphism (RFLP) method was developed and tested. The sensitivity of the modified nested PCR was tested using serial dilutions (103 to 10−2) of the DNA extract of a cultured L. donovani DD8 strain. Patients (n = 194) from Southern Sri Lanka were examined clinically, microscopically (Slit Skin Smear-SSS) and using the modified nested PCR. The modified nested PCR detected 2.55 fg of parasite DNA compared to ITS1 PCR (25 fg) and detected more cases than SSS (94.3% vs. 77.3%; p < 0.01). The RFLP pattern was L. donovani in all cases. The modified nested PCR performed well in clinically doubtful lesions (95% by PCR vs. 60% by SSS; p < 0.01), ulcerated nodules (91% vs. 71.8%; p < 0.01) and plaques (100% vs. 66.7%; p < 0.01). SSS demonstrated sensitivity (80.9%), specificity (81.8%), PPV (98.7%) and NPV (20.5%) against modified PCR. Low parasite loads and atypical lesions can be diagnosed by the proposed method with higher accuracy.