Sri Lanka stocks closed at their highest level in four years as the prospects for peace between the government and Tamil Tiger separatists improve.

The Colombo all-share index closed up 16.9 points, or 2.5%, at 682.60 after being closed on Friday and Monday for Buddhist holidays.

"Local high-net-worth individuals and institutions expect the peace process to materialise and the economy to be better than last year," said Prasanna Chandrasekera, a broker at John Keells Stockbrokers.

The Sri Lankan government on Tuesday announced its latest privatisation, the sale of a 90% stake in fuel bunker operator Lanka Marine Services (LMS).

The Colombo stock market has risen about 10% this year, mainly in the last three weeks.

Peace talks

The gains came despite officials saying that peace talks set for June in Thailand may be delayed for a few weeks.

The government and the Tamil Tigers signed a Norwegian-brokered ceasefire in February to end an ethnic conflict that has killed more than 64,000 people in almost two decades.

Sri Lanka's new government has offered political autonomy to minority Tamils in exchange for peace, but the exact form of devolution has not yet been worked out.

Privatisation bid

The shares in LMS, which has a monopoly over marine fuel imports and also services ships, will be allocated from 14 June.

The sale comes as the US is preparing to sign an agreement to allow its military aircraft and ships to refuel and be serviced in Sri Lanka.

The USS Hopper, which stopped at the island last month, was the first US ship to port there in eight years.

Sri Lanka is also seeking a free trade agreement with the US.

The International Monetary Fund, in which the US is the largest shareholder, is about to release $60m for Sri Lanka.

The funds are being seen as a sign of approval for the country's economic restructuring, which includes privatisations.