* Rupee weaker on importer, stx-related dollar demand
* Cenbank limits forward contacts to curb volatility
* Currency dealers, traders fret at cbank move
COLOMBO, March 1 (Reuters) - Sri Lanka's rupee ended down on Thursday on importer dollar demand, after the central bank imposed a limit on forward dollar trading to curb what it called speculation-driven volatility.
The rupee closed at 122.25/122.40 to the dollar, against Wednesday's close of 121.80/122.00, on importer dollar demand and share-related transactions, dealers said.
The central bank on Thursday restricted import and export forward contracts to 90 days. There were no restrictions earlier.
"This is to deal with too much speculation," Central Bank Governor Ajith Nivard Cabraal told Reuters. "Volatility arises from speculation. We want the market to be smoother."
The central bank on Tuesday said it will intervene in the market through either dollar sales or moral suasion, having dropped a price-specific defence that cost it $2.7 billion in reserves in the second half of last year.
"This will worsen the situation further," a currency dealer said on condition of anonymity. "If you don't allow exporters to book forward for a longer period, the market's dollar position will get reduced, resulting in low dollar liquidity and thus you may see dollar demand going up further."
A Reuters monthly forex poll on Wednesday forecast the rupee to fall as far as 128.50 by the end of August.
The rupee has fallen 6.7 percent since Feb. 9, when the central bank stopped defending the rupee.
In the stock market, foreign investors sold shares worth 159.6 million rupees ($1.31 million) worth of shares, extending the offshore outflow to 965.3 million rupees over two sessions. So far this year, the net foreign inflow has been 2.22 billion rupees, after a net outflow of 19.1 billion last year.
The main share index edged up 0.21 percent or 11.59 points to hit 5,469.68 as retail investors bought weakened shares, and block deals in Hayleys PLC and LB Finance PLC boosted turnover.
Hayleys, which ended 5.53 percent firmer at 379.90 rupees, accounted for 40 percent of the day's turnover of 2.6 billion Sri Lanka rupees. Shares in LB Finance closed 1.59 percent firmer at 140.20 rupees, and the block trades accounted for 40 percent of the turnover.
Shares in top conglomerate and market heavyweight John Keells Holdings PLC rose 1.37 percent to 177.90 rupees a share.
The Colombo bourse is one of the worst performers this year among Asian markets, with a 9.96 percent loss while the majority have had positive returns. ($1 = 121.9000 Sri Lanka rupees) (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Bryson Hull)