Many retail investors avoided the market during the year due to high interest rates and a lack of confidence in the local regulatory environment.
The head of the Securities and Exchange Commission (SEC) resigned in August, citing pressure to quit, and analysts said boosting the confidence of retail investors through strong regulatory measures and reducing market interest rates will be key to gains in the coming year.
Retail investors account for around 60 percent of the daily trade in the bourse.
On Monday, the main share index closed 0.64 percent, or 35.87 points firmer, at 5,643, its highest close since Oct. 19, Reuters data showed.
It fell 7.1 percent for this year, compared to an 8.5 percent decline in 2011.
The island nation saw a foreign inflow of 38.63 billion Sri Lanka rupees ($303.81 million) in 2012, compared with last year's $168 million outflow.
'We see a positive sentiment next year as interest rates have started to fall,' a stockbroker said on condition of anonymity. 'Foreign buying in select blue chips still continues.'
Treasury bill yields eased by between 21 and 49 basis points at a weekly auction last week in line with a surprise cut in interest rates earlier this month.
Foreign investors bought a net 137.4 million rupees worth of shares, extending net foreign buying this year to a record 38.63 billion rupees.
The day's turnover was 289.3 million rupees, far below this year's average of 883.6 million rupees. Last year's daily average was 2.3 billion rupees.
The rupee fell to 127.50/60 to the dollar in dull trade amid mild importer demand for dollars, currency dealers said.
The currency has depreciated 10.7 percent in 2012 after the central bank allowed a flexible exchange rate regime in February this year. ($1 = 127.1500 Sri Lanka rupees)
(Reporting by Shihar Aneez; Editing by Toby Chopra)
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