Political infighting between Mr Wickremesinghe and President Chandrika Kumaratunga has stoked speculation that the prime minister might call a general election in the coming months.

The unstable political situation will not only have an impact on the peace process, it will also have an impact on the economic development of the country

Milinda Moragoda Economic Reforms Minister

Elections would put ongoing peace talks with the separatist Liberation Tigers of Tamil Eelam on hold. They could also delay economic reforms.

The Colombo all-share index closed down 3.03%, or 20.8 points, to 666.7.

"The market is virtually crashing," said Naren Godamunne, a broker at DFCC Stockbrokers.

"Speculation that an election will be called if the prime minister's negotiations with the president fall through has created uncertainty in the market," he said.

The all-share index is now up about 7% this year but sharply down from a four-year high in July of 682.6, a 20% gain.

Political spat

A cabinet minister warned that the political spat could slow efforts to end the island's two decade old civil war.

"The unstable political situation will not only have an impact on the peace process, it will also have an impact on the economic development of the country," Economic Reforms Minister Milinda Moragoda said.

The government wants Ms Kumaratunga - who is elected separately - to reduce some of the powers she is granted by the constitution and have threatened to go to the polls if she doesn't.

An election would be the third in as many years.

The last poll in December removed Ms Kumaratunga's Peoples' Alliance in favour of Mr Wickremesinghe, the leader of the United National Party, who ran on a pro-peace, pro-business platform.

The bickering comes as the government and the Tamil Tigers, fighting since 1983 for a separate Tamil state, prepare for direct peace talks after signing a ceasefire in February.