In July 1983 communal riots took place due to the ambush and killing of 13 Sri Lankan Army soldiers by the Tamil Tiger Terrorists. Using the voters list which contained the exact addresses of Tamils, the Tamil community faced a severe backlash from the Sinhalese rioters including the destruction of shops. It was rumoured that people behind the riots were government thugs supported by Jayewardene and his cabinet. While many Sinhalese were involved in the mob, many other Sinhalese kept Tamil neighbours in their homes to protect them from the rioters. Conservative government estimates put the death toll at 400with 150,000 leaving the country resulting in a Tamil Diaspora in Canada, UK, Australia and other western countries.

Jayewardene held office until 1989, ruling as a virtual dictator under emergency powers. In 1987, following an army offensive in the Vadamarachchi peninsular, India started getting deeply involved in the ethnic conflict. A convoy sent by India was stopped in Sri Lankan waters by the Sri Lankan Navy and the Indian Air Force retaliated with an air drop of supplies onto the Jaffna peninsular. While the UNP organised street protests against India, Jayawardene declared that he would defend the country's independence to the last bullet.

However, the air drop also caused Jayawardene to reconsider his position and he then accepted the offer of Indian Prime Minister Rajiv Gandhi of a Peace Accord. Rajiv Gandhi's offer to send troops into Sri Lanka was deeply unpopular with the Sinhalese and, although initially popular with the Tamils, led to an outbreak of hostilities between the Tamil Tigers and the Indian Peace Keeping Force (IPKF) - Eelam War II.

In 1989 Jayewardene was succeeded by his own choice as President, Ranasinghe Premadasa, who asked for the Indian troops to be withdrawn - which was later done by Indian Prime Minister V.P. Singh. Premadasa was assassinated by a Tamil Tiger suicide bomber in 1993. Rajiv Gandhi had already met a similar fate in 1991.

Premadasa was succeeded by Dingiri Banda Wijetunga, with Ranil Wickremasinghe as Prime Minister. In August 1994 the People's Alliance under Bandaranaike's daughter Chandrika Kumaratunga won legislative elections on a platform of concessions to the Tamils and a 'balanced economy'. Kumaratunga became Prime Minister and in November she was elected President, appointing her 78-year-old (but still active) mother Prime Minister. A ceasefire ensued, which broke down after several months - the beginning of Eelam War III. Under the Bandaranaikes the war dragged on, with the military unable to defeat the separatists and the government opposed to negotiations. By 2000 an estimated 65,000 people had been killed in the conflict.

At Presidential elections in 1999, former Prime Minister Wickremesinghe of the UNP contested on a platform of no concessions to the Tamils, but was defeated by Kumaratunga. A 180-degree turn in UNP policy occurred and in December 2001 the UNP returned to office on a policy of a negotiated settlement with the Tigers, with Wickremasinghe as Prime Minister. A cease fire began, the first long cessation of hostilities since the beginning of the conflict. But the 1978 constitution left the Prime Minister with little power against a hostile President, and Kumaratunga did all she could to frustrate Wickremesinghe's government. In March 2004 she dismissed Wickremesinghe and called fresh elections, which returned the SLFP to office under Mahinda Rajapakse.

By 2005 there had been no further progress towards either a military or political solution. The assassination of Foreign Minister Lakshman Kadirgamar in August 2005, by the LTTE (although they denied responsibility), further hardened attitudes. His successor was Anura Bandaranaike, the President's brother and putative political heir. Twenty years of civil conflict had done immense damage to Sri Lankan society and the economy, which has fallen behind other Asian economies, although it remains the second most prosperous nation in South Asia.

In elections held on 17 November 2005, Mahinda Rajapakse, the son of Don Alwin Rajapaksa, was elected President, defeating Wickremasinghe. He appointed Ratnasiri Wickremanayake Prime Minister.