COLOMBO, March 10 (Reuters) - Sri Lankan shares rose more than 1 percent on Thursday, set for their best day since late January, rebounding from a seven-session losing streak that saw the bourse lose about 5.5 percent.

The bourse hit their lowest level in about 27 months on Wednesday as a government move to hike value added tax (VAT) and reintroduce capital gains tax to qualify for a $1.5-billion IMF loan weighed on sentiment.

The market was hit especially hard in the past two days, falling, 3.2 percent, after the country's prime minister announced the tax moves on Tuesday to break out of a debt trap.


Sri Lanka's benchmark share index was up 0.95 percent, or 55.40 points, at 5,917.75 at 0652 GMT on Thursday, distancing itself from its intraday low of 5,802.02 on Wednesday, which was the lowest since December 2013.

With the central bank's unexpected hike in interest rates in mid-February and yields on treasury bills at two-year highs, investors prefer fixed interest rate bearing assets over risk assets, stockbrokers said.

Financial companies, which tend to benefit from higher interest rates, led the market's rebound on Thursday.

"Market has turned around and we feel the stabilisation point has reached," said Dimantha Mathew, head of research, First Capital Equities (Pvt) Ltd.

"We believe the market will be in the range of 5,800 to 6,000 level, with volatility here and there," Mathew said.

Turnover stood at 158.77 million rupees ($1.10 million).


The rupee traded weaker on importer dollar demand, currency dealers said.

One-week rupee forwards, which act as a proxy for the spot currency, traded at 145.25/30 per dollar at 0655 GMT compared with Wednesday's close of 145.15/20.

"The demand is there, investors are still worried that foreign investors will exit with the capital gain tax," a dealer said, asking not to be named.

The spot currency did not trade below 143.90, seen as the central bank's desired level. ($1 = 144.8000 Sri Lankan rupees) (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Savio D'Souza)