* Exporter convert dlrs, IMF approval boost sentiment
* Shares up; tax raise, interest rates weigh
COLOMBO, April 3 (Reuters) - Sri Lanka's rupee gained 1.7 percent Tuesday as exporters sold dollars after the International Monetary Fund approved disbursement of a long-delayed loan tranche of $426.8 million to the government.
The rupee strengthened to 126.00/126.30 a dollar from Monday's close of 128.25/128.30. Dealers said the currency strengthened to 125.60 some importer dollar demand curbed the surge. The currency has risen 4.3 percent since hitting a record low of 131.60 on March 19.
But it has fallen 9.4 percent since the central bank stopped defending it on Feb. 9.
The IMF on Tuesday approved the eighth tranche of Sri Lanka's $2.6 billion loan with waivers after the island nation adopted a flexible exchange rate and took measures to avert a balance-of-payments crisis.
On Tuesday, the central bank said the country's reserves had increased to $6.1 billion after the IMF approval and were enough to cover 3.6 months imports, which should help improve confidence that the monetary authority's could handle a sudden flight of foreign capital.
The stock market edged up 0.3 percent or 17.95 points to 5,416.65 on Tuesday as the IMF announcement gave some confidence to retail investors while block deals in Commercial Bank of Ceylon PLC, which edged up 0.30 percent, pushed the turnover.
Analysts said investors still remained cautious of rising interest rates, the direction of rupee and an expected fall in corporate profits.
The day's turnover was 1.53 billion Sri Lanka rupees ($11.93 million), slightly above this year's daily average of 1.37 billion. Foreign investors were net buyers of 374 million.
The Colombo bourse is one of the worst performers this year among Asian markets, with a 10.83 percent loss. ($1 = 128.3000 Sri Lanka rupees) (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Bryson Hull)