UPDATE 1-Sri Lanka shares plunges 4 pct on price limit

* Bourse records highest intraday fall of 202.21 points

* SEC defends its price control strategy

* Rupee at 20-month high; c. bank cuts trading band-dealers

(Adds bourse, rupee close and details)

COLOMBO, Aug 9 (Reuters) - Sri Lanka's stock index .CSE suffered its biggest ever daily fall on Monday, sinking 4 percent, as investors panicked that a new rule limiting stock price movements to 10 percent would hinder trading.

Sri Lanka's main share index .CSE, fell 4.4 percent or 222.9 points to 4,842.34, its biggest intraday in point terms. It finished 4 percent weaker at 4,862.86, its lowest close since July 23.

Asia's top bourse performer so far this year, notching up a gain of 43.6 percent, has dropped 6.7 percent since the Securities and Exchange Commission imposed the trading limits on Thursday after it had halted trading in four stocks due to unusual price movements. [ID:nSGE6730L1] [ID:nSGE6720EG]

"Investors have totally lost confidence in the market," said an analyst on condition of anonymity. "Market should be based on demand and supply, this kind of intervention has made investors panic and wary of the bourse."

Three other unnamed analysts said the regulator should have taken action against traders suspected of manipulating prices, instead of slapping on a blanket rule which will hamper market activity.

The SEC told Reuters the move was to bring down the shares that have artificially risen. [ID:nSGE6780CK]

Analysts said almost all blue chips were down, led by market heavyweight John Keells Holdings JKH.CM, down 2.2 percent at 251.60 rupees.

Turnover was 1.3 billion rupees ($11.6 million), over two times the 2009 daily average, but below this year's average of 2 billion rupees. Foreign investors sold a net 71 million rupees' worth of shares on Monday. Overall this year they have sold a net 10 billion rupees.

The rupee LKR= hit a near 20-month high of 112.27/30, from Friday's close of 112.35/40, its highest since Dec. 23, 2008, Reuters data showed.

Currency dealers said the state bank, though which the central bank directs the market, cut its dollar trading band by 10 cents to 112.25/75 rupees. ($1=112.285 Sri Lankan rupees) (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Louise Heavens)