COLOMBO, April 6 (Reuters) - Sri Lankan shares recovered from early losses to post their second straight gain on Wednesday, as local retail investors bought beaten-down banking and diversified stocks, though continued selling by foreign investors on worries over macroeconomic stability weighed on sentiment.

Foreign investors sold a net 190.95 million rupees ($1.32 million) worth of equities, their fifth straight session of selling, and extending the year-to-date outflows to 3.05 billion rupees.

"Retail investors were trying to keep the market alive. But we expect the selling pressure to bounce back as interest rates remain high with the negative sentiment," said Dimantha Mathew, head of research, First Capital Equities (Pvt) Ltd.


The benchmark share index ended 0.1 percent, or 6.09 points, higher at 6,165.11, its highest close since Feb. 29.

Turnover was 616.4 million rupees, less than this year's daily average of 790.9 million rupees.

The market will see subdued trade in the coming days due to the Sinhala-Tamil new year on April 13 and 14, traders said.

Analysts said investors are cautious about macroeconomic uncertainty after a rating downgrade and unclear capital gain tax.

Sri Lanka on Friday postponed a plan to reintroduce capital gains tax by six months after the move threatened to dent foreign investor sentiment.

Stockbrokers said the concern now is how the government is going to impose the tax, rather than the tax itself.


Higher market interest rates and higher borrowing by the island nation facing a balance-of-payments crisis have also weighed on investor appetite for risky assets, dealers said.

The average weighted prime lending rate has risen 84 basis points to 9.19 percent since Feb. 19, when interest rates were increased by 50 basis points, central bank data showed.

Cargills (Ceylon) Plc shares rose 3.57 percent, while Sri Lanka Telecom Plc gained 0.25 percent. ($1 = 144.5000 Sri Lankan rupees) (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Subhranshu Sahu)