* Investors believe ex-army chief's release could ease intl pressure on the country
* Retailers buy. Large, institutional investors stay on sidelines
* Rupee flat; excess liquidity due to cen bank buying bonds
COLOMBO, May 16 (Reuters) - Sri Lanka's stock market climbed more than 2 percent on Wednesday to a one-week high as retail investors snapped up hotel and diversified shares on the hope that President Mahinda Rajapaksa would soon order the release from prison of the former army chief and prompt more foreign inflows to the market.
The main share index rose 2.03 percent in intraday trade but it closed 1.71 percent, or 87.82 points, up at 5,213.68, its highest close since May 9. It was the third consecutive session posting a gain.
An opposition lawmaker and the main negotiator on behalf of the former army chief, General Sarath Fonseka, said he believed the president would order his release soon.
Fonseka is serving two sentences handed down by civilian and military courts, including a conviction for misappropriation, after challenging Rajapaksa in the 2010 presidential election. He is considered a national hero by many Sri Lankans for his role in helping end a 25-year civil war.
Analysts said his release would be seen as a positive step in addressing human rights issues.
"The move could ease the international pressure on Sri Lanka with regard to lack of democracy and rights violations, this will help to boost foreign investor sentiment on Sri Lanka," said a stockbroker who asked not to be identified.
Since the end of the civil war in 2009, foreign investors have been reluctant to invest in Sri Lanka's bourse amid heavy international pressure on Rajapaksa's government to address rights abuses, particularly in the final stages of the conflict.
The hotel sector boosted overall market sentiment with Aitken Spence PLC and Asian Hotels and Properties PLC gaining 3.24 percent and 1.52 percent respectively as the government data showed that tourist arrivals in April rose 9 percent from a year earlier.
Analysts said large and institutional investors remained concerned about economic woes, with uncertainty over the rupee currency and rising interest rates.
The bourse had fallen 6.34 percent over nine sessions through last Friday as investors sold their stakes over worries about a defaulted share deal on The Finance Company, which is now under a regulatory investigation.
The daily turnover was 542.5 million ($4.20 million), the highest since May 9, but well below this year's daily average of 1.1 billion rupees.
The index is still one of the worst performers among Asian markets, with a 14.17 percent loss so far this year.
The rupee ended flat at 128.90/129.00 against the dollar from Tuesday's close, as importer demand offset dollar sales by exporters, dealers said.
The benchmark 91-day t-bill rates eased 20 basis points to 11.99 pct on excess market liquidity of more than 30 billion rupees, which dealers attributed to the central bank buying dollars from a foreign bond sale by a state bank.
K.D Ranasinghe, the central bank's assistant governor, said the monetary authority bought a portion of the Bank of Ceylon's $500 million bond inflow, but gave no exact figures. ($1 = 129.0500 Sri Lanka rupees) (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Ron Popeski)
source - .www.reuters.com
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