Resuming at 2-66, skipper Steve Smith started the rot when he tried to launch Rangana Herath down the ground in just the second over and was stumped by Dinesh Chandimal for 30.
Usman Khawaja (26) went soon after and, save for a 60-run partnership between Adam Voges and Mitch Marsh, wickets fell consistently.
While the pitch was playing a few tricks, Australia - following a longer-than-usual tour preparation to get accustomed to the local conditions - were unable to cope with Sri Lanka's canny spinners.
It was a case of old and new getting the job done - 38-year-old 70-Test left-arm finger spinner Herath bagging 4-49 while Lakshan Sandakan, a 25-year-old left-arm chinaman on debut, took 4-58.
Voges had his heart in his mouth when he survived a lbw review first ball but patiently chipped away to top-score with 47.He found the pitch tricky, especially Herath's accuracy and changes of pace and angle, as well as picking Sandakan's wrong'un.
"No one's really mastered (the pitch) yet over these two days," said Voges.
"It's tough going - it's hard to score on ... it's probably just the inconsistencies around the bounce and the spin - some do, some don't. Some bounce a bit more than others; some keep a bit low.
"So I just tried to play as straight as I could and bat for as long as I could."
Marsh would've gained some confidence in making 31, crunching some drives before the allrounder became Sandakan's first Test wicket when he played inside the line to a wrong'un and was bowled.
Peter Nevill's scratchy 10-minute dig ended on two when he hit Herath straight to mid-on.
The wicketkeeper's shot wasn't any prettier to watch than his captain's.
Australia won't want to chase many in the fourth innings to win, so they'll be intent on repeating something similar with the ball as on day one when they blasted out Sri Lanka in 34.2 overs.
Sri Lanka made a terrible start to their second dig, Mitchell Starc trapping the promoted Kusal Perera lbw for four just before rain forced the players from the field.