Sri Lanka were reeling at 98-4 at tea on day three in Galle on Saturday and staring at their second loss in the two-Test series against a dominant Australia.

The hosts still require a further 60 runs to avoid an innings defeat, with survival looking improbable.

With the picturesque Galle Fort providing a natural grandstand, hundreds of Australian supporters perched themselves atop the historic ramparts to enjoy a commanding performance from their side.

The fans celebrated as off-spinner Nathan Lyon became only the third Australian to claim 550 Test wickets, joining the exalted company of Shane Warne (708) and Glenn McGrath (563).

Fittingly, Lyon's Test career began at Galle in 2011 and he celebrated the milestone in style, tightening the screws on Sri Lanka.

Despite Australia losing seven wickets in the morning session to be bowled out for 414, their first-innings lead of 157 put them well ahead.

Alex Carey turned entertainer-in-chief with a swashbuckling 156 -– his career-best knock and the highest score by an Australian wicketkeeper in Asia.

Prabath Jayasuriya, Sri Lanka's spin spearhead, claimed his 11th five-wicket haul, but it was only a consolation with the visitors remaining firmly in control.

Sri Lanka's reply got off to a shaky start, with left-arm spinner Matthew Kuhnemann making early inroads.

Dimuth Karunaratne, playing in his final Test innings, walked off to a standing ovation after he fell to Kuhnemann for 14, with even the Australian players acknowledging his stellar career.

The veteran opener, who became only the seventh Sri Lankan to play 100 Tests, bows out as the nation's fourth-highest run-scorer and their most prolific opener.

Lyon's landmark wicket was straight out of a coaching manual.

With long-off and long-on left vacant, he dangled the carrot for Dinesh Chandimal, who attempted an ambitious lofted shot.

But the former captain failed to get the required elevation and the ball nestled safely in the hands of mid-off -- a classic trap, perfectly executed.

Kamindu Mendis, recently named ICC Emerging Player of the Year, endured a series to forget, failing to reach fifty after four innings.

His poor run continued when he chipped a simple catch to mid-off, handing Lyon his second wicket of the innings.

The visitors have already put the Warne-Murali Trophy beyond Sri Lanka's reach, having taken an unassailable 1-0 lead with a crushing victory in the first Test.

That innings and 242-run humiliation stands as Sri Lanka's worst defeat in Test history.

str/pjm/pbt