Turnover was 1.6 billion rupees.
Brokers said the market plunged in the morning after a brief opening rally.
"There was a bloodbath today as the Index broke the key technical support level of 6,000," Bartleet Religare Securities said.
"There were 225 losers to 13 gainers as all stocks were sold down with increased volume. The index will now trade in its new range of 6,000 to 5,800."
The brokers said the steep fall in the main index came despite a stable John Keells Holdings which has the biggest market cap with 6.73 percent and People's Leasing Co. (1.28 percent) which showed little downside movement.
SC Securities said investors were "pushing the panic button."
People's Leasing Company, which began trading Thursday, was the most actively traded stock, with 4.3 million shares traded.
It closed 10 cents below its IPO price, at 17.90 rupees, according to the volume weighted average price on the bourse.
PLC went up to 18.30 during the day and a low of 17 rupees.
Transactions in John Keells Holdings accounted for the days biggest turnover with the stock closing flat at 175 rupees and over 3.3 million shares traded, including two crossings of off-market private deals each of 500,000 shares at 175 rupees a share.
Several warrants of Environmental Resources Investments were among the biggest losers of the day.
ERI's W0003 warrants closed at 13 rupees, down 2.70, W0006 ended at 13.10, down 2.50 and W0002 closed at 13 rupes, down 2.30.Almost plantations companies traded Thursday fell, except one.
Balangoda Plantations closed at 27 rupees, down 4.50, with 131,300 shares traded.
HVA Foods, the second most actively traded share, closed at 32.70 rupees, down 4.30 with 1.26 million shares changing hands.
The government said it will go ahead with expropriation of 37 businesses deemed under-performing under a controversial new law that has been opposed by the private sector and which rating agencies have warned could deter investors.
Cabinet spokesman minister Keheliya Rambukwelle said the competent authorities have appointed with immediate effect to handle the 37 enterprises that have been taken over by the state.
Meanwhile, interest rates in overnight markets for gilt backed repos hit 8.00 percent and call rates hit a two year high of 9.25 percent and forward dollar rates also rose, dealers said.
Bartleet Religare Securities said the lack of money in the system is a "big threat going forward" and could push the index down further.
" . . . easing of credit conditions can inject a much needed boost for markets," they said.
"In the Government securities auction yesterday, we saw a notable rise in the bill and bond rates which is an indication of rates going forward. We feel that we may see a rise in the risk free rates and hence borrowing costs."
Correction: price of People's Leasing Co.