He was speaking in the wake of the killing of two men in a mob attack on Shi'ites in the town of Sampang in East Java province.
President Susilo Bambang Yudhoyono has told the Indonesian media the issue is a complex one based on faith, but also on an internal family conflict.
But Dr Fealy said it was part of a broader problem.
"It's certainly a localised issue which has gotten out of control, but I don't think it can be separated from a broader growing antipathy, toward the Shia minority," he told Radio Australia's Connect Asia.
Recently, he said, Indonesia's Religious Affairs minister said that he does not regard Shias as Muslim.
"That's a fairly damning statement from the person in charge of running religious affairs in the country," he said.
The Shia religion is legal in Indonesia, but some fundamentalists from the dominant Sunni faith label it as heretic.
"We regret this incident," said Indonesian President Susilo Bambang Yudhuyono. "And to be honest it stains our religious tolerance and peace in our society."
The President has sent two senior Ministers and security chiefs to the area to assess the situation.
Agency reports suggest the two victims were among a group of Shi'ite students who were attacked by some 500 villagers believed to be mainly Sunnis and armed with machetes and sickles.
The home and school of a local religious leader, who was sentenced to jail for blasphemy in July, was burned to the ground and police confirmed that two people died, another six were injured and nearly 40 homes set on fire but they have refused to confirm that the attack was sectarian.
But human rights groups are accusing the government of turning a blind eye to a growing wave of religious intolerance.
"This is the ultimate failure of the state to protect its citizens. To protect those with religious beliefs and peaceful beliefs," Usmin Hamid of the International Centre for Transnational Justice.