COLOMBO, Sep 21 Sri Lanka's rupee ended slightly firmer on Friday, as state banks stepped

COLOMBO, Sep 21 (Reuters) Sri Lanka's rupee ended slightly firmer on Friday, as state banks stepped in to the market to smooth volatility, dealers said, while the bourse rose led by some select blue chip shares.

The rupee closed at 113.40/113.50 per dollar, a notch firmer from Thursday's close of 113.45/113.55, and holding off a new all-time closing low of 113.57/113.62 hit on Tuesday.

Some individual banks quoted weaker bid rates at close, while the highest intraday trade was done at 113.50 rupee per dollar, traders said.

''State banks bought lots of dollars early in the day and then they sold them at 113.50 to maintain the rate. Some other banks sold as the dollar is depreciating after the Federal Reserve (rate) cut,'' said a currency dealer.

The local currency has recovered slightly since Wednesday after traders said the central bank urged foreign exchange dealers in a closed-door meeting to help halt the depreciation of the rupee by convincing exporters to sell dollars.

The rupee has depreciated 5.6 percent so far this year, on top of a 5 percent depreciation in 2006.

Some analysts expect the rupee to continue to depreciate to as much as 118-120 per dollar by the end of the year. Others are eyeing 114 per dollar. The six-month forward rate stood at 121.03/121.258 rupees per dollar on Friday.

The rupee is steadily depreciating mainly due to a hefty trade deficit, owing to costly fuel imports, and inflation, which quickened to 17.3 percent in August as measured on a 12-month rolling average -- near 1994 highs.

The Colombo All Share <.cse> index closed 0.42 percent firmer at 2,584.77 points, a rise of 10.74 points, after falling three days in a row.

''The market was more or less dull as there is no positive news on the political or economic front to move the market up considerably,'' said Rajive Dissanayake, research manager at HNB stockbrokers.

Foreigners were net buyers, purchasing 26.19 million rupees ($0.23 million) worth shares.

Market heavyweight and leading mobile operator Dialog Telekom rose 1.06 percent to 23.75 rupees a share as calculated on weighted average, pulling back from losses on Thursday.

Leading fixed line telephone operator Sri Lanka Telecom closed unchanged at at 33.50 rupees a share, while conglomerate John Keells Holdings rose 0.77 percent to 120.75 rupees.

The bourse is down 14.3 percent from life highs in mid February, while it has dropped by 5.1 percent since January this year.

For more technical analysis of the Colombo Stock Exchange by Reuters please go to www.reutersindia.net/sri%20lanka.htm.

The Central Bank lifted restrictions on its reverse repurchase agreement window on Friday for a second successive day to bring down high interbank lending rates or call rates , which rose as high as 25 percent in intraday trade.

The bank released 6 billion rupees at 12 percent into the market after banks faced a shortage of rupees, which increased the call rate.

However, despite the central bank's efforts, call rates rose to 20.014 percent from 16.937 percent on Thursday as calculated on a weighted average.

(US$1= 113.45 rupees) REUTERS MP AS1750