Sri Lanka has rich cyanobacterial diversity, however, only few studies have been conducted to identify the potential toxin producers in water bodies used for human consumption. As the detection of cyanotoxin is vital in water quality management, a study was done by employing 16S rRNA gene to explore the genetic divergence, phylogenetic relationships and potential toxin producing cyanobacteria in reservoirs and well waters in the dry zone of Sri Lanka. Forty five, 16S rRNA gene sequences were assayed and phylogenetic tree was constructed. Among 45 isolates, 20 isolates were classified as unidentified cyanobacteria and considered as novel cyanobacterial genera. Of 25 identified isolates, seven isolates were identified up to species level. With 16S rRNA phylogeny, 20 unidentified cyanobacterial isolates were able to place on their taxonomic positions up to order level. Results revealed that water samples understudy had vast cyanobacterial diversity with potential microcystin (MC) and cylindrospermopsin (CYN) producers and eleven clusters clearly demonstrated five cyanobacterial orders with more than 90% similarity irrespective to their toxicity which showed the suitability of 16S rRNA gene for taxonomic differentiation. Sixteen isolates had the potential to produce MC and two isolates to produce CYN. Findings of the study confirm the rich cyanobacterial diversity and the divergence among the potential cyanotoxin producers in the dry zone water bodies of Sri Lanka.Electronic supplementary materialThe online version of this article (doi:10.1186/s40064-016-3680-5) contains supplementary material, which is available to authorized users.