Prices of most shares fell Wednesday including plantations which had drawn investor interest after tea prices at the Colombo auctions recovered.
Brokers said foreign investors would have made use of the upturn in recent days to sell out.
Foreigners were on the selling side yesterday when the market rose four percent with a net outflow of 27 million rupees.
Brokers said foreign investors were known to be usually more savvy than most local small investors by buying when stock prices fall and selling when they rise.
Until Tuesday, the All Share Index of the Colombo had risen 20 percent this year, prompting the market regulator to call it one of the best-performing bourses, after having lost 40 percent last year.
The Colombo stock exchange halted trading for 30 minutes under new rules that came into effect at the beginning of this year that provide for a cooling off period if the market drops too sharply.
Under the new rules the trading halt is imposed if the liquid Milanka Price Index (MPI) drops over five percent from the previous market day's close.
The All Share Price Index fell 4.
98 percent (90.14 points) to end at 1,720.13 Wednesday while the Milanka ended 6.
89 percent (138.51 points) down to close at 1,870.
34.
Turnover was 202 million rupees.
The indices were dragged down by heavyweight Dialog Telekom, which lost 75 cents to end at five rupees with over 1.9 million shares traded, believed to be foreign selling.
"In the last two days the market went up mostly because retail investors bought shares but they don't have holding power," said Srimal Liyanage of Lanka Securities.
"They want to buy and sell at a small gain.
"