Analysts said the shock announcement by President Mahinda Rajapakse in his maiden address to the nation Saturday to ditch the 2006 budget currently before parliament and replace it with populist spending measures could scare off investors and undo fiscal discipline.

Rajapakse, who narrowly beat pro-market challenger Ranil Wickremesinghe in Thursday's ballot, pledged to slash prices of goods ranging from milk powder to fertiliser and revamp the cabinet.

Investors said there was already concern that the new president could dampen business confidence with Sri Lanka's tiny stock market losing 52 billion rupees (520 million dollars) in value Friday as the main index plunged nearly seven percent, or 171 points, to close at 2,328.

"The market uncertainty will linger for awhile, it remains to be seen how the new president reaches out to the business community," said Chinthaka Ranasinghe, head of research at John Keells Stockbrokers.

"As it is, the budget next year was fiscally disciplined given the context in which it was presented," Ranasinghe said. "Investors don't like sudden jerks in policy statements, given the fact that Sri Lanka presented a budget two weeks ago."

Rajapakse's unprecedented move to roll back the budget for 2006 also raised fears that any moves to translate the subsidy-laden manifesto into action could be a financial disaster.

The tsunami-hit island is already creaking under the strain of high oil prices and inflation at 12 percent and higher subsidies could cost more than 50 million dollars.

But Rajapakse said his reputation was on the block.

"I have decided to bring before parliament new budget proposals based on the 'Mahinda Chintanaya' (my philosophy)," he said after taking the oath as Sri Lanka's fifth executive president. "I believe it is necessary to begin my term of office with the people's confidence in me intact."

Rajapakse, whose skills lie in building and managing coalition partners, has not demonstrated that he was comfortable with issues of economic management.

His first move, he said earlier last week, would be to raise fertiliser subsidies for farmers.

Such "sweeteners" highlight his biggest economic test - dispensing with handouts such as fertiliser and fuel - and paying more attention to plug the worsening fiscal deficit, hovering around nine percent of gross domestic product.

"This (cutting the deficit) will not be a popular move, but he will have to do it now, if he wants to achieve six percent growth," said private economist Sonali Dassanayake.

Analysts say his immediate priority should have been to implement the existing 2006 budget and portray himself as an investor-friendly president to the business community.

The now defunct budget had not included the subsidies Rajapakse pledged during his campaign, even though his party ruled parliament and the presidency.

"Attempts to include his manifesto (in the budget) will be fiscally irresponsible," said economist and CEO of Frontier Research, Amal Sandaratne.

Sri Lanka's 20-billion-dollar economy is heavily dependent on foreign remittances, clothing and tea exports and tourism.

The economy expanded every quarter since a February 2002 ceasefire with Tamil Tiger rebels, but there were fresh fears for the peace process after a pro-rebel newspaper said they could not expect a peace deal with Rajapakse.

Rajapakse's main alliance partner, the Marxist JVP, is against privatisation and market reforms. They also see the bloated public sector as the engine for future growth.

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