The All Share Price Index closed down 1.
56 percent (49.00 points) to end at 3,082.91, while the Milanka Index of more liquid stocks dropped 1.93 percent (68.60 points) to close at 3,478.33, according to provisional stock exchange data.
Turnover was 885.2 million rupees.
"The market made use of the Rajaratnam insider dealing scandal to take a breather," Nikita Tissera of SC Securities said.
Sri Lanka's stock market has risen sharply since May when government forces defeated the Tamil Tiger separatists, ending a 30-year war that had retarded the economy which could now be revived.
Analysts had warned that stock prices may have risen too high, too fast and that a correction was imminent.
Sri Lankan-born Raj Rajaratnam and the Galleon Fund managed by him had investments of over 12 billion rupees in the Colombo bourse.
He also has supposedly bought over 52 million shares of conglomerate John Keells Holdings (JKH) with his personal funds, brokers said.
JKH closed at 148.00 rupees, down 5.00 with 371,600 shares traded.
Other significant investments made by the Galleon Fund include National Development Bank (NDB), Commercial Bank, Chemical Industries (Colombo) and DFCC Bank.
Commercial Bank closed at 187.00 rupees, down 3.75, and DFCC Bank closed at 159.00 rupees, down 5.25.
Chemical Industries (Colombo) closed at 67.
00 rupees, down 1.00, and NDB closed at 197.00 rupees, down 4.00.
Brokers said uncertainty over the GSP Plus preferential trade agreement with the European Union (EU) has also got some investors worried.
The GSP Plus system grants tax free entry for Sri Lankan goods to the EU zone, which gives manufacturers an edge over rivals from other countries such as China and India which compete on better economies of scale.
Dialog Telekom closed at 7.25 rupees, down 25 cents, and Sri Lanka Telecom closed at 45.
00 rupees, down 1.00.
Tokyo Cement non-voting closed at 17.
50 rupees, down 50 cents with over one million shares changing hands.
Retailer favorites Lanka Cement closed flat at 30.
25 rupees, while forestry company Touchwood Investments closed at 93.
75 rupees, down 1.25.
Close-ended-fund, NAMAL Acuity Value Fund closed at 49.
00 rupees, one rupee below its issued value.