Sri Lanka shares rise on banks as rupee falls

* Main share index up 0.34 percent

* Investors snap up banks on loan, leasing growth hopes

* Banking shares hit record high

* Rupee falls on importer dollar demand

COLOMBO, Aug 25 (Reuters) - Sri Lanka's benchmark share index rose on Wednesday led by a surge in banking stocks boosted by expectations cuts to import taxes and the central bank's interest rate will lead to an increase in lending.

Sri Lanka's main share index .CSE rose 0.34 percent from Monday to 5,582.87 points. Markets were closed on Tuesday for a public holiday.

It hit an all-time high of 5,679.14 on Friday and is Asia's best performer with around 64.9 percent gain so far this year, although analysts have said the bourse has overheated with local retail investors chasing speculative shares instead of fundamentally sound stocks.

The banking, financial, and insurance sector sub index .CSEBF hit a new record high led by 10 percent jumps in DFCC Bank DFCC.CM and leasing firm Lanka Orix Leasing Company LOLC.CM.

"The recent cut in import levies has boosted the vehicle leasing business while the relaxation in monetary policy last week is expected to expand credit growth further," one analyst said on condition of anonymity.

Sri Lanka cut import taxes in June, and last week, the central bank relaxed its monetary policy for a second-straight month. [ID:nSGE6500J9], [ID:nSGE67J04W]

Turnover on Wednesday was 1.9 billion rupees ($17 million), over three times the 2009 daily average. Foreign investors sold a net 93.8 million rupees' in shares. They have sold a net 11.6 billion rupees of stock so far this year.

The rupee LKR= closed weaker at 112.63/67 per dollar, down from Monday's 112.50/56 due to an increase in importers' demand for dollars, dealers said. ($1=112.65 Sri Lankan rupees) (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Karen Foster)