However, a Sri Lankan military intelligence official said on the condition of anonymity that Rajaratnam, 52, had a "very cordial relationship" with the present government.

Last month, Rajaratnam pledged $1 million to help rehabilitate former fighters of the Liberation Tigers of Tamil Eelam (LTTE).

No suspicion

The Sri Lankan stock market regulator said it had no suspicion of any untoward dealings by Rajaratnam in its market, but said it would investigate his trades nonetheless.

"We are looking at his recent transactions closely. Given what has unfolded in the US, in light of that, we want to look at his positions here," Channa De Silva, the Sri Lankan Securities and Exchange Commission head, told the Reuters news agency.

The Galleon Group has had as much as $7bn in assets under its control.

By comparison, the total value of outstanding shares on the Colombo Stock Exchange was $8.63bn on Monday.

In a sign of Rajaratnam's influence on the Sri Lankan market, either as an investor or through Galleon Group, the Colombo Stock Exchange had its biggest intra-day drop in five years before recovering to close down 1.56 per cent.

Higher economic-growth hopes, more market liquidity, a $2.6bn International Monetary Fund loan, an upgraded rating outlook and foreign inflows have all boosted investor confidence since the end of the war.

Rajaratnam's arrest created headlines in Sri Lanka, where he is viewed with admiration for his success but also suspicion because of at least $5 million that US records show he gave to the Tamil Rehabilitation Organisation (TRO).

Funds frozen

Rajaratnam has not been charged with any crime in Sri Lanka, nor has the US charged him in the case of the TRO.

The TRO's funds were frozen in both countries after they were found to have been channelled to the LTTE, defeated by the Sri Lankan army in May to end a 25-year war.

"The TRO investigations are continuing. It's not clear yet. The involvement of the Galleon fund with funding the TRO is also being probed," Ajith Nivard Cabraal, the Central Bank governor, told the Reuters news agency in Jaffna.

The Sri Lankan foreign ministry had passed an intelligence dossier on Rajaratnam to US authorities in 2007, around the time the TRO was being investigated by the US treasury, two Sri Lankan officials familiar with the matter told Reuters.

The US, Sri Lanka and Britain all have put the now-defeated LTTE on their banned "terrorist organisation" lists.