Sri Lanka were bowled out for 101 in 19.
3 overs after being sent in.
The match is effectively a knock-out encounter.
The team that wins will go through to the semi-finals, while the losers will be eliminated.
Stuart Clark took four for 20, the best figures by an Australian bowler in Twenty20 internationals.
Clark built on early breakthroughs by Brett Lee and Nathan Bracken, who took advantage of early life in the pitch.
The first three wickets fell for 11 runs in the first three overs.
Clark took over as Sri Lanka crashed to 43 for seven before Jehan Mubarak and Chaminda Vaas put on 40 for the eighth wicket.
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Mubarak made top score of 28 before lofting a catch to extra cover off all-rounder Shane Watson, playing in his first match of the tournament.
But Watson had to leave the field after bowling two balls of his fourth over, clutching the left hamstring that had kept him out of action.
Watson replaced Australian captain Ricky Ponting, who was ruled out o