COLOMBO - The Sri Lankan rupee ended steady on Monday as political crisis in the South Asian island nation showed signs of easing after President Maithripala Sirisena reinstated the premier he had initially sacked in a widely criticised move, but foreign outflows from stocks weighed on sentiment.

Political paralysis remained the main concern for investors since Sirisena abruptly sacked Ranil Wickremesinghe from the prime minister's post and replaced him with Mahinda Rajapaksa, who failed to win a parliamentary majority and resigned on Saturday as a government shutdown loomed.

Wickremesinghe sworn in as Sri Lanka's prime minister on Sunday, making a remarkable comeback weeks after being ousted by President Sirisena under controversial circumstances. 

The Sri Lankan rupee strengthened in early trade on Monday, while bond yields dropped as a seven-week political crisis appeared to ebb, but investors took a cautious stance to observe whether Sirisena and Wickremesinghe could work together. 

Rajapaksa resigned soon after taking office and giving the country's president a political space to prevent an imminent government shutdown.

On Thursday, the Supreme Court ruled that President Sirisena's decision to dissolve parliament ahead of its term was unconstitutional, in a setback for the embattled leader in his dispute with an ousted prime minister.

If a budget is not approved by the parliament this month, the government might face a shutdown, government officials told Reuters.

Foreigners were net sellers of a net 18.1 million rupees ($100,723) worth of stocks on Monday. They have been net sellers of 10.6 billion rupees since the political crisis began on Oct. 26. The bond market saw outflows of about 56 billion rupees between Oct. 25 and Dec. 14, central bank data showed.

The rupee which traded slightly firmer in the early trade ended steady at 179.90/180.00 per dollar, compared with 179.90/180.10 the previous session.

Credit rating agencies Fitch and S&P downgraded Sri Lanka's sovereign rating last week, citing refinancing risks and an uncertain policy outlook, after Sirisena's sacking of his prime minister in October triggered the political crisis. 

This year, there have been 20 billion rupees of outflows from stocks and 148.2 billion rupees from government securities, the latest data from the bourse and central bank showed.

The rupee hit a record low of 180.85 to the dollar on Nov. 28. It has weakened about 3.8 percent since the political crisis began. The currency dropped 1.8 percent in November, and has lost 17.1 percent this year.

Moody's downgraded Sri Lanka on Nov. 20 for the first time since it started rating the country in 2010, blaming the political turmoil for aggravating its already problematic finances. 

Five-year government bond yields have risen 60 basis points since the political crisis began, while yields on Sri Lanka's dollar bonds due in have risen around a percentage point to 8.0 percent through Friday, fell 0.5 percent to 7.5 percent on Monday.

The Colombo stock index ended up 0.08 percent at 6,067.63 on Monday. Turnover was 133.8 million rupees, well below this year's daily average of 821.6 million rupees.

($1 = 179.7000 Sri Lankan rupees)

(Reporting by Ranga Sirilal and Shihar Aneez, Editing by Sherry Jacob-Phillips) ((ranga.sirilal@thomsonreuters.com; +94-11-232-5540; Reuters Messaging: ranga.sirilal.thomsonreuters.com@reuters.net ; www.twitter.com/rangaba))