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Prime minister Ratnasiri Wickremenayake told parliament that the price of a litre of petrol will be cut by 20 rupees and furnace oil by 10 rupees.
Petrol would come down to 122 rupees and 135 rupees for the two types sold.
The reduction would be the second in two months.
In early November, the government cut fuel prices when it presented its budget for 2009.
The price reduction comes at a time when the island's supreme court is hearing a public interest petition challenging the government's pricing of fuel.
The court has ordered the Treasury Secretary to explore the possibility of reducing fuel prices in Sri Lanka in response to a petition filed by an opposition parliamentarian.
Sri Lanka has been overpricing petrol amidst charges of fleecing petrol users.
Though the wholesale cost of petrol is only 25 rupees a litre, Sri Lanka's government has set a price of 122 rupees a litre even after the latest price cut.