With a return of over 106 percent so far this year, it is the second-best performing bourse in the world after Lima's stock market. Its rise is around double that of the benchmark emerging market equities index .MSCIEF.

The All-Share Price Index of Colombo Stock Exchange jumped 3.22 percent to 3,115.25 points by 0849 GMT, surpassing the previous record of 3,038.48 points traded on Feb. 19, 2007.

It closed 2.66 percent or 80.23 points firmer at 3,098.24, Reuters said.

"This is more than expected," said an analyst on condition of anonymity. "We expect corrections on some of those shares, which have risen with the rally without any reasons. Only clear signs of quarterly earnings could help to maintain the rise" Danushka Samarasinghe, the head of research at Asia Securities, said the surge was due to improving economic numbers:

"The last quarter of this year and the next year are expected to grow much higher due to optimism on Sri Lanka's post-war economy. We expect the index to move further up as the psychological barrier of the previous record is surpassed."

Sri Lanka won a 25-year war against the LTTE in May and the market has risen over 62 percent since.

Falling interest rates have prompted many investors to switch out of bonds into stocks, analysts said.

"Interest rates sliding down as low as 10 percent helped the market," said Harsha Fernando, CEO at the SC securities in Colombo. "There is a lot of foreign interest seen."

Analysts and traders said though there have been a lot of queries from foreign funds on the bourse, they are yet to see inflows into the market.

As of Monday, net foreign inflows totaled 530.7 million rupees ($4.62 million) this year, a fraction of the 14.1 billion rupees seen in 2008.

The central bank said foreigners have invested $1.5 billion so far this year into government securities as of Friday and analysts said high yields in the past were the reason for high foreign investments in bonds than shares.

After such a rapid rise, some brokers said the bourse was now overheated. Reuters charts show that the 14-day relative strength index was at 84 on Monday, above the 70 threshold used to indicate when a market is overbought.