The Australians were beaten by 106 runs in the series-opener in Kandy, having been spun out for 161 on day five.

It was Smith's first loss in 12 Tests as captain, Australia's first to Sri Lanka since 1999 and their seventh-straight defeat in 'Asian' conditions, including series against Pakistan in the United Arab Emirates and in India.

The bowlers did their job on the opening day, dismantling Sri Lanka for 117, but returns of 203 and 161 with the bat were not good enough. Smith was the only Australian to pass 50 in the match, with a fighting 55 in the second innings.

"I think our batting, we lacked a little bit of discipline in our first innings. I thought we were in a good position to get a much bigger lead than 86, so we didn't push on as much there as we would have liked," Smith said.

"In the third innings of the match, I didn't think we did a great deal wrong. Kusal Mendis played an exceptional innings to score 176 - I guess that took the game away from us."

The tourists doggedly fought for a draw on Saturday, no doubt hoping there would be another case of bad light or rain. It wasn't to be.

Peter Nevill and injured spinner Steve O'Keefe survived for 178 balls in a stand of only four but their resistance would ultimately be broken.

"I was really proud of the way Peter Nevill and Steven O'Keefe fought hard at the end. It wasn't easy, some balls were skidding, some were spinning, but it was difficult and they found a way to get through it," Smith said.

"From the batters' point of view, we need to find a way to be successful in these conditions. We let the spinners into the game a lot more than we probably should have.

"Rangana (Herath) got the majority of his wickets on the inside of the right-handers' bat and the outside of the left handers, so we have got to find a way to play that a lot better in Galle."

Smith defended his first-innings dismissal when, having seen his team to safety after a nervous start with the bat on day one, he was stumped early the following morning, having charged Rangana Herath, who would claim nine wickets for the match.

"I generally play spinners quite aggressively. I've hit that ball for four or six several times throughout my career," he said.

"I got beaten on the inside of the bat. It's just summing it up and making sure I play with a straighter bat if I'm trying to go over the top. I know it looked ugly and it probably didn't look great.

"For me, it's about making sure I still have that intent to score."

The tourists now face a desperate fight to stay in the three-Test series on what is expected to be a sharp-spinning wicket in the coastal city of Galle.

Smith said each batsman needed to find a "game plan that can work".

"For some, it might be being a little bit more aggressive. For others, it might be sitting on the crease and using their bat out in front. We just have to find a way," he said.

The Australians will make one forced change. O'Keefe, who batted with a strained hamstring, will return home, and has been replaced by Victorian Jon Holland. Smith said Holland, whom he spent time with at the national cricket academy, would need to learn the nuances of the sub-continent quickly.

"He's going to have to get a game plan and the speeds that he needs to bowl together pretty quickly," Smith said.

"We'll be working with him to make sure he gets that in and I'm really excited for him to come and join us."

Smith said the loss of O'Keefe in Sri Lanka's second innings had hurt as he was "looking very ominous out there".

"He's pretty shattered. He was doing an exceptional job. He's almost the perfect sort of bowler for these conditions," Smith said.

"He bowls quite similarly to Rangana Herath, hits the stumps and bowls with that cross-seam. He was doing a terrific job and I'm shattered for him."