The mid-term polls further strained the uneasy coalition between President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe as they faced a resurgent challenger in Rajapakse's new party.
Official results showed Rajapakse's Sri Lanka Podujana Peramuna -- SLPP or People's Front -- had won 160 of the 241 councils counted so far, out of a total of 340.
Wickremesinghe's United National Party (UNP) was a distant second with 30 councils while Sirisena's Freedom Alliance languished with just 10.
His SLPP was predicted to wrest control of more than two-thirds of the local government bodies, according to unofficial tallies kept by both the ruling party and opposition.
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"I earnestly request all those who contested under the SLPP to celebrate this hard-won victory peacefully and with restraint and in a manner that will not inconvenience the defeated side," Rajapakse said in a statement.
The vote affects only the lowest rung of politics but the result is being seen as a stinging rebuke to the ruling coalition, which has struggled to pass promised post-war reforms.
Wickremesinghe's UNP had been expected to lead Saturday's poll while the parties led by Sirisena and Rajapakse were expected to fight for second.
Rajapakse's surprise dominance was proof the people no longer had faith in the tattered ruling alliance, said SLPP spokesman Gamini Lakshman Peiris.
"This was a referendum on the government. It has no legal or democratic right to remain in power," Peiris told reporters.
The UNP had indicated it may go it alone in the next general election in 2020 as the rift between Wickremesinghe and Sirisena and their supporters deepened.