The rupee recovered to close at 125.10/30 a dollar, down from Wednesday's close of 124.40/60. Three dealers Reuters spoke to said the highest trade was done at 125.20.

"It will have a freefall for the moment without any concrete inflows," said a currency dealer on condition of anonymity.

Analysts expect the rupee to recover in April on declining dollar demand and expected exporter conversions.

On Thursday, the island nation's Economic Development Minister Basil Rajapaksa said the currency will stabilise.

"The government doesn't want to intervene. We are confident that the rupee will stabilise and I can't say any number on that. But it will be a fair number for both importers and exporters," Rajapaksa told reporters in Colombo.

The rupee has depreciated 8.7 percent since the central bank on Feb. 9 stopped defending a specific exchange rate. A Reuters monthly forex poll has forecast the rupee to fall as far as 128.50 by the end of August.

The stock market meanwhile fell to a three-week low as investors stayed away on negative sentiment due to slower economic growth forecasts and fears of high interest rates.

The island nation's main share index fell 0.39 percent or 20.87 points to 5,397.20, lowest since Feb. 21.

The day's turnover was 418.9 million Sri Lanka rupees ($3.36 million) well below last year's daily average of 2.3 billion. Volume was 14.2 million. Last year's daily average was a record 102.7 million. Foreign investors bought shares worth 94.8 million rupees, extending the offshore net foreign inflow to 3.22 billion rupees so far this year, after a net outflow of 19.1 billion last year.

The Colombo bourse is one of the worst performers this year among Asian markets, with a 11.15 percent loss.