Brokers said that although military gains against the Tigers could end the war and restore economic stability, the global slowdown was likely to hit company earnings.
Trading volumes were low and was dominated by small investors with institutional investors still on the sidelines.
Worries over weak company earnings because of the global economic slowdown are likely to outweigh military gains over Tamil Tiger rebels that could bring an early end to the ethnic war and revive the local economy.
The All Share Price Index slumped 2.
56 percent (46.12 points) to end at 1,755.47 while the more liquid Milanka dropped 4.
39 percent (84.97 points) to close at 1,850.71.
Turnover was 93 million rupees.
The indices were dragged down by falls in the prices of Dailog, John Keells Holdings and Sri Lanka Telecom, said Dharshi Ganeshan, research analyst at Bartleet Mallory Stockbrokers.
"We expect the market to remain volatile.
Whenever people get the chance of taking profit, they keep realizing it.
"
Investors use market downturns to pick stocks and sell at a profit on the upturn.