The All Share Price Index closed at 4,470.78, down 76.40 points, while the more liquid Milanka index dived 1.88 percent (96.62 points) to close at 5,033.41.
Turnover was 2.14 billion rupees, according to stock exchange provisional figures.
"The lack of resistance let the market slide and goes through a much awaited correction," Thakshila Hulangamuwa, vice president at stock brokering firm Asha Phillip Securities said.
"This fall reflected mostly on highly speculated stocks could take a direct message to investors prompting them to look at shares that offer real values."
Penny stocks which were heavily speculated in the past few days were heavily hit, brokers said.
Blue Diamonds Jewellery Worldwide closed at 4.70 rupees, down 1.55 with 2.6 million shares traded, its non-voting shares closed at 2.
10 rupees, down 1.00 with 9.2 million shares changing hands, brokers said.
Sierra Cables closed at 3.70 rupees, down 10 cents with 5.5 million shares traded, brokers said.
Muller and Phipps closed at 1.30 rupees, down 10 cents with over 1.2 million shares traded, and Piramal Glass Ceylon closed at 2.
80 rupees, down 10 cents with 2.1 million shares changing hands.
Seylan Merchant Bank closed flat at 1.70 rupees, with 9.0 million shares changing hands, while its non-voting shares also closed flat at 1.40 rupees, with 3.6 million shares traded.
Conglomerates, Aitken Spence closed flat at 1,500.
00 rupees, Hayleys closed at 295.
50 rupees, down 7.50 and John Keells Holdings, an index heavy stock closed at 198.
75 rupees, down 2.25.
Commercial Bank closed at 176.00 rupees, down 6.00 with over a million shares traded, Hatton National Bank closed at 270.
25 rupees, down 3.25, Nations Trust Bank closed at 52.50 rupees, down 25 cents.
Sampath Bank closed at 338.00 rupees, down 5.25 and Seylan Bank closed at 72.00 rupees, down 3.25, DFCC Bank closed at 247.00 rupees, down 9.50.
Distilleries Company of Sri Lanka, another index heavy stock closed at 124.
50 rupees, down 1.50.