COLOMBO - SRI Lanka's central bank on Monday placed a troubled private bank in state custody, saying the move was aimed at preventing a collapse of the country's entire financial sector.

The Central Bank of Sri Lanka exercised its regulatory powers to place the Seylan Bank in state custody and appointed state-owned Bank of Ceylon as the new manager of the private bank, a statement said.

'The difficulties of Seylan Bank Plc presented a potential danger to the stability of the (country's) financial system,' the Central Bank of Sri Lanka said in a statement.

Officials said there was a run on Seylan bank deposits on Monday before the central bank stepped in.

A senior central bank source said that the government will initially manage the Seylan bank for a period of six months and then decide if it should return the operation to its owners, led by businessman Lalith Kotalawala.

Kotalawela and his Ceylinco group controls 23 per cent of Seylan whose affiliate, the Golden Key Credit Card Company failed to honour its debts running into millions of dollars last week.

In a notice over the weekend, Kotelawala said the Ceylinco group will sell off its controlling stake in the Seylan bank to settle the debts of the failed Golden Key Credit Card company.

With 160 billion rupees ( S$2.02 billion) in assets, Seylan controlled six percent of Sri Lanka's total banking assets, according to Fitch Rating agency.

Just before the central bank move, the Seylan bank's chief executive Ajith Pasqual said they were looking for a foreign or local buyer to take up the controlling stake.

The collapse of the Golden Key Company and the run on Seylan deposits was the first sign of international financial woes hitting the tiny economy of Sri Lanka, which is also embroiled in a separatist war with Tamil rebels. -- AFP