The All Share Price Index closed at 2,878.96, up 1.01 percent (28.73 points) while the Milanka Price Index of more liquid stocks closed at 3,282.96, up 1.10 percent (35.74 points).
Turnover was 369 million rupees, according to provisional Colombo Stock Exchange statistics.
Brokers and analysts said the recent slide in share prices, into an apparent 'over-sold' position, had made some stock prices attractive enough to entice buyers back into the market.
"There was a strong rebound today," said Nikita Tissera, Manager Research at SC Securities.
"After the recent fall in the market, investors must be seeing some stock prices as cheap."
Company earnings were looking healthy after the latest crop of earnings for the September quarter.
"The fundamentals are fine. Selected companies have recorded very good earnings. And investment alternatives to equities are not very atteactive."
Sri Lankan interest rates have fallen steeply in recent months, along with inflation, with the government also putting pressure on banks to lower rates.
The day's biggest deal was the sale of a big stake in Ceylon Leather Products, the island's largest footwear manufacturer, by Galleon International Master Fund, owned by Raj Rajaratnam.
Brokers said 3, 626,000 shares of Ceylon Leather Products changed hands at 55 rupees a share, accounting for the bulk of the day's turnover. The stock closed at 56.50 rupees, up 1.50
Galleon was the single largest shareholder in the firm with a 30 percent stake or 3.7 million shares of Ceylon Leather Products, which owns the DI shoe brand.
It had bought the bigger part of the stake at 55 rupees a share in November 2007 when the main shareholder at the time, S A Perera & Company, sold out to Galleon and Lionhart Investment funds for 206 million rupees.
The buyer of the Galleon stake in Ceylon Leather was believed to be Lionhart, the firm's second biggest shareholder, and related parties, brokers and analysts said.
Rajaratnam, who had denied the insider delaing charges, is believed to be selling his holdings to raise cash to repay investors who have been withdrawing money from his fund after his arrest.