COLOMBO, June 22 (Reuters) - Sri Lankan shares fell for a third straight session on Wednesday to hit a more than 8-week closing low as investors turned cautious ahead of a monetary policy rate announcement by the central bank later in the week.

The central bank will announce June monetary policy rates at 1230 GMT on Friday and the market broadly expects rates to be left steady for a fourth straight month, although a possible rate hike is not ruled out.

A decision by Moody's to revise downwards Sri Lanka's outlook on its sovereign rating, continued foreign fund outflows, rising interest rates, and a government proposal to reintroduce capital gains tax also weighed on investor sentiment, brokers said.

ADVERTISEMENT

The benchmark Colombo stock index ended down 0.4 percent, or 26.08 points lower, at 6,420.80, its lowest close since April 26. The index shed nearly 1 percent last week.

"The biggest concern is the uncertainty over capital gains tax. The government has not clarified if it will be imposed on equities or not," a stockbroker said asking not to be named.

Sri Lanka's cabinet on June 15 approved a proposal to reintroduce the tax, especially on land sales, with a cabinet spokesman saying no decision had been taken on whether the tax would apply to capital gains in the share market.

Moody's Investors Service on Monday revised down Sri Lanka's outlook to negative from stable, citing further weakening in some fiscal metrics in an environment of subdued GDP growth, which could lead to renewed balance of payments pressure.

Overseas funds have offloaded 5.74 billion rupees ($39.11 million) worth of equities so far this year, but were net buyers of 46.9 million rupees worth of shares on Wednesday, buying on a net basis for the first time in five sessions.

Turnover stood at 570.1 million rupees, well below this year's daily average of around 752.5 million rupees.

ADVERTISEMENT

Shares in Ceylon Tobacco Company Plc fell 1.43 percent, while Commercial Bank of Ceylon Plc lost 1.26 percent and conglomerate John Keells Holdings Plc dropped 0.57 percent.

Treasury bill yields rose between 1 and 3 basis points at a weekly auction on Wednesday. They have risen between 7 and 43 basis points since the central bank left the key policy rates steady on May 20.

The average prime lending rate edged up 3 basis points to 10.50 percent in the week ended June 17. Stockbrokers have said rising interest rates could be detrimental to risk assets if they jump beyond 12 percent. ($1 = 146.7500 Sri Lankan rupees) (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Biju Dwarakanath)