The All Share Price Index closed at 2,902.
70, down 2.07 percent, or 61.49 points while the Milanka Price Index of more liquid stocks closed at 3,242.06, down 2.44 percent or 81.18 points.
Turnover was 570 million rupees, according to provisional Colombo Stock Exchange statistics.
Bartleet Mallory Stockbrokers said foreign investors were on the buying side with a net inflow of 117.
8 million rupees.
Charith Kamaladasa of Lanka Securities said investors appeared nervous with the market falling for two weeks and might be selling in anticipation of further falls to avoid possible losses.
"Investors are worried they may have to sell at a huge loss. So there's some selling pressure."
He said the banking and finance sector was particularly hard hit.
The government last week ordered state banks to slash lending rates and commercial banks are expected to follow suit, which might reduce their profit margins.
DFCC Bank, which has just announced sharply higher profit for the September quarter, closed at 143 rupees, down 3.
75.
Commercial Bank closed at 167 rupees, down 6.
50, Hatton National Bank at 85.75, down 2.50, and Sampath Bank at 174, down six rupees.
Activated carbon manufacturer Haycarb, whose price rose the day before after it announced a surge in profits, closed at 102 rupees, down two rupees.
Janashakthi Insurance Company, the most heavily traded stock of the day, was one of the few which gained in value, climbing over its issue price to close at 13 rupees, up 1.50 with over 6.9 million shares traded.
"Janashakthi went up mainly because of its announcement of a two rupee interim dividend," said Kamaladasa.
Brokers and analysts said investors were worried about political and economic developments that could affect the economy and company earnings.
They said Sri Lanka might lose the GSP Plus trade deal giving duty free access to European Union markets because of human rights concerns.
Also, talk of elections next year had created some uncertainty.
And a probe by US authorities into insider dealing in the US by Raj Rajaratnam, founder of the Galleon hedge fund, who is a big investor in local equities, was also a nagging concern, they said.
Updated