The All Share Price Index closed at 7,184.77, down 1.17 percent (84.82 points) while the Milanka Price Index of more liquid stocks closed at 6,693.92, down 1.20 percent (81.22 points), according to stock exchange provisional figures.
Turnover was 2.4 billion rupees.
"The rally in the past two days was unsustainable because there is not enough liquidity in the market because of the credit issues," an analyst said.
Sri Lanka's stocks have been driven up partly by naked broker credit given to clients and also through margin trading.
The regulator has asked punters to halve their broker credit or replace them with bank margin accounts by end March and fully regularize their positions by June, in a bid to prevent a bubble from worsening and collapsing steeply.
Recent rallies were largely driven by gains in illiquid stocks, with a widening gap between the Colombo All Share Index and the Milanka Index of liquid stocks.
Ascot Holdings shares closed at 112.30, up 22.10 rupees with over 3.6 million shares traded. There were five crossings of 1.
8 million shares done.
The company has eight million shares in issue.
Union Assurance closed at 165.00, down 10.70 rupees. John Keells Holdings said it bought a 5.
6 million share stake at 150 rupees upping its take in the firm to 95.6 percent from 80.7 percent.
Pan Asia power closed at 4.10, up 0.20 cents with over 68 million shares traded.