Rajapakse's win was poorly received by investors

The narrow victory of prime minister Mahinda Rajapakse over the oppostition leader Ranil Wickramasinghe was poorly received by investors, prompting a dramatic sellof which caused the main share index to drop by seven percent.

The Colombo stockmarket began its downward spiral on Thursday, when it became apparent that rebel Tamil Tigers in the North and East of the country were boycotting the election.

LTTE boycott

The lack of votes from the north was seen as a severe blow for the opposition leader. Mr Wickramasinghe's willingness to embrace free market policies in order to encourage local and foreign investment had attracted widespread approval from Colombo's business community.

But the prospect of a government led by the Prime Minister Rajapakse caused unease - amid fears his Nationalist allies could undermine the economic reform process.

Panic selling early in the day eased off later, as bargain hunters moved in. And despite the dramatic falls, analysts remain confident the pessimism will be short-lived.

Short-term reaction

Asanga Senaviratne, Chief Executive of Brokerage firm Asia Securities said, "The market was initially down nine percent but it has picked up and it's down seven percent. My personal feeling is that it's only a knee-jerk reaction and the market will gain back to the levels that it was, very very quickly, because the fundamentals are very good and I don't think Rajapakse administration is going to be any different from what we have seen with the Bandaranaike administration."

The new president will take office over the weekend, and the Colombo exchange is expected to begin the new week in a calmer mood. Meanwhile many commentators believe that investors' worst fears are unlikely to be realised.

Sri Lanka remains dependent on foreign goodwill to help rebuild an economy damaged by years of civil war. As a result, the president is expected to take a pragmatic approach to economic policy - and resist the urge for dramatic change.