Turnover was 426.93 million rupees, down from 499.40 million rupees a day earlier, with stocks of 118 firms closing in the red against 52 gainers.
Foreign Selling
Foreigners bought 59.68 million rupees worth shares while selling 176.30 million rupees of shares.
Index heavy JKH topped the turnover list with 60.04 million rupees falling 2.70 rupees to close at 206.30 rupees, contributing most to the index drop.
Brokers said foreign selling was seen Tuesday in John Keells Holdings, Commercial Bank and DFCC Bank.
John Keells Holdings has seen heavy foreign selling in recent days with at least one top shareholder on the lookout to sell more shares, brokers said.
There have also been selling by several foreign funds including long term players, in stocks such as Dialog, Lanka Lubricants and Aitken Spence in recent days, helping trigger a sell-off in the broader market.
It is not clear whether foreign sales are to meet redemptions of individual emerging market funds, or due to country specific concerns.
At least one fund has been seen systematically closing its positions, brokers said.
But some foreign investors have been buying stocks totaling 1.6 billion rupees since February 2012, stock exchange data show.
Sri Lanka's economy is recovering from a balance of payments crisis and profits of companies and banks are starting to stabilize with interest rates also falling.
But concerns are rising over deteriorating rule of law, citizen's freedoms and property rights.
The UN is expected to move a resolution calling on Sri Lanka to improve human rights and probe alleged war crimes in March.
Ceylon Tobacco Company closed 28.90 rupees lower at 1,090.70 rupees. JKH’s W0022 warrants closed 80 cents lower at 57.20 rupees and its W0023 warrants closed 10 cents lower at 61.00 rupees.
NDB ended 7.60 rupees lower at 176.00 rupees and Commercial Leasing and Finance closed flat at 3.90 rupees. Distilleries closed flat at 207.00 rupees.
Carson Cumberbatch ended 2.20 rupees higher at 352.30 rupees and Lanka IOC closed 80 cents higher at 37.90 rupees. Bukit Darah ended 6.00 rupees lower at 554.00 rupees and Nestle Lanka ended 10.00 rupees lower at 1,990.00 rupees.
Forex Markets
In forex markets the rupee closed 131.02/10 to the US dollar crossing the 131 mark in the spot market.
Foreign equity sales are also impacting the forex market on some days, dealers said. Funds have also been able to exit equity markets partly due to liquidity provided by state managed funds, brokers say.
But uncertainty over the currency has been a regular occurrence since the 'flexible' exchange rate rate policy coupled with heavy purchases of official inflows that has been practiced since the latest balance of payments crisis.
Dealers in the spot market have come under heavy moral suasion from authorities repeatedly, with unfortunate market participants going through various dramas including selling in the spot-next market.
Sri Lanka's central bank buys dollar inflows without allowing inflows to the state to appreciate the currency and the resulting rupee liquidity later tends to generate imports.
Recently proceeds of a billion US dollar bond boosted liquidity in money markets, which have been mopped up overnight or through term auctions of bills.
But lack of similar enthusiasm im selling dollars at the price at which they were bought, when the rupees are spent on imports and hit the forex markets, pressures the rupee and undermine confidence, generating unnecessary uncertainty analysts have said.
Authorities have been selling dollars to smaller banks, Tuesday dealers said, while exporters held back due to weak sentiment.
Selling dollars amid excess liquidity mops up rupees, tightening the monetary system (unsterilized forex sales) and does not undermine a loose peg to the dollar, unlike dollar sales followed by subsequent liquidity injections (sterilized sales).
Update II