COLOMBO Jan 12 (Reuters) - Sri Lankan share index fell for a seventh straight session on Tuesday due to panic selling, led by margin calls after the market fell over 3.5 percent in the past six sessions, brokers said.

Fears over investors shifting to risk-free assets such as government securities due to rising yields in government securities also dented sentiment.

The main stock index ended 1.74 percent or 115.97 points down at 6,534.35, the lowest close since July 7, 2014. The index fell as much as 1.85 percent, posting its biggest fall since Aug. 24, 2015.

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"Market came down due to margin calls and panic selling," said Dimantha Mathew, research manager at First Capital Equities (Pvt) Ltd.

The bourse dipped further into an over sold territory on Tuesday with the 14-day relative strength index at 17.311 points versus Monday's 22.844, Reuters data showed. A level between 30 and 70 indicates the market is neutral.

The turnover was at 997.2 million rupees ($6.94 million).

Foreign investors were net sellers of 271.4 million rupees worth of equities on Tuesday extending the year to date net foreign outflow to 1.95 billion rupees, compared with 4.43 billion rupees of outflow in 2015.

Local investors are worried of more monetary tightening after the central bank raised commercial banks' statutory reserve ratio by 150 basis points with effect from Jan. 16.

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Following the central bank's move, the yield on 91-day t-bill rose 19 basis points to an over three-month high of 6.78 percent at a weekly auction on Tuesday.

Shares in Nestle Lanka Plc fell 2.09 percent, Lion Brewery Plc lost 9.61 percent and conglomerate John Keells Holdings Plc closed 1.83 percent lower, dragging the overall index.

Commercial Bank of Ceylon Plc, the country's biggest listed lender, fell 1.89 percent. ($1 = 143.7000 Sri Lankan rupees) (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Anand Basu)