President Chandrika Kumaratunga's hard-hitting televised address showed she was not intimidated by the huge show of public support for her arch rival. She said a grave threat to national security had forced her hand.
She asked Prime Minister Ranil Wickremesinghe to join her in a unity government - an idea that has surfaced repeatedly over the past decade but has never been attempted because of the deep policy and personal difference between the main parties.
"I call upon all parties in parliament...to join me to form a grand alliance...with the objective of forming a government of national reconciliation," she said.
"During the last two years, the sovereignty of the state of Sri Lanka, its territorial integrity and the security of the nation have been placed in grave danger," said Kumaratunga, who was seriously wounded by a Tiger suicide bomber in 1999.
Wickremesinghe (R) arrived to a
Kumaratunga denied she was trying to scuttle the peace process, saying the ceasefire would stand and that Wickremesinghe would continue pursuing peace.
"My commitment to peace is total, it is not a sheepskin I put on to grab power," she said.
But Kumaratunga said Norway's role in the peace bid needed a closer look.
"Norwegian facilitation will continue, whilst clear instructions will be issued to them regarding the parameters and limits of their responsibilities within terms of reference that will be issued to them," she said.
Earlier, fresh from receiving a seal of approval for his peace bid in the United States, Wickremesinghe was mobbed by rapturous crowds.
While he was away, Kumaratunga, who has bitterly criticised his handling of peace moves with Tamil Tiger rebels, suspended parliament until 19 November and sacked three of his most powerful ministers, plunging the island into crisis.
"Parliament must re-assemble. It is the only body with a mandate for negotiations," Wickremesinghe said.
"My commitment to peace is total, it is not a sheepskin I put on to grab power"
Sri Lankan president
The crisis has been looming since Wickremesinghe won parliamentary elections in late 2001, campaigning on a platform of peace talks with the Liberation Tigers of Tamil Eelam (LTTE) to defeat Kumaratunga's party.
A Norwegian brokered ceasefire has mostly held since February 2002 but Kumaratunga has accused Wickremesinghe of conceding too much to the Tigers, one of the world's most ferocious guerrilla groups.
Political observers said the stand-off could end in a general election, the third in four years.
Talk of a possible political compromise helped boost the island's stock market more than 12% on Friday, after it fell 13% on Wednesday and was flat on Thursday on the political jitters.
The LTTE has said political infighting in the capital would make it more difficult to cut a peace deal, but on Friday the rebels said they would remain calm.
"We have to observe the political turmoil in Colombo quite soberly... We can remain patient as long as we are strong," military leader Colonel Karuna was quoted as saying by the pro-rebel Tamilnet website.