In an exclusive interview with the BBC, the Nobel peace prize winner acknowledged problems in Rakhine state, where most Rohingya people live.
But she said ethnic cleansing was "too strong" a term to use.
Instead, Myanmar's de-facto leader said the country would welcome any returning Rohingya with open arms.
"I don't think there is ethnic cleansing going on. I think ethnic cleansing is too strong an expression to use for what is happening," she told the BBC's special correspondent Fergal Keane.
Ms Suu Kyi added: "I think there is a lot of hostility there - it is Muslims killing Muslims as well, if they think they are co-operating with the authorities.
"It is not just a matter of ethnic cleansing as you put it - it is a matter of people on different sides of the divide, and this divide we are trying to close up."