Rural poverty remains pervasive in Sri Lanka and many land operators are trapped in poverty. Some have argued that aspects of rural poverty can be addressed by altering the main smallholder tenure systems. This study explored the linkages between rural poverty and government involvement in smallholder land tenure. It examined the impacts of the current situation of the Land Development Ordinance (LDO) and different reform scenarios with the help of qualitative data and stakeholder interviews conducted in 10 village sites across the country. The study revealed that as a result of LDO restrictions, choices available for permit holders and grantees have been constrained. Only few permit holders/grantees are aware of their rights or responsibilities under the LDO and various complexities involved with the system. Inheritance rules cause much distress. Limited illegal sales of LDO land take place and land prices are 15-25 per cent lower for LDO land than similar private land. Land plot size tends to be declining, with only a few cases of consolidation. However, it seems that lack of competition in rural markets, lack of infrastructure etc. are more binding constraints than land tenure in terms of their effect on agriculture poverty. Researchers recommend the implementation of a minimum reform scenario to tackle rural poverty and to make LDO more pro-poor. This should be undertaken first and the results reviewed prior to introduction of reforms to allow outright sale. Land for encroachers and landless can be addressed systematically with the help of new areas identified by updating plans in Mahaweli and other areas. They also recommend removing inheritance and subdivision rules for LDO and LG (SP) lands, introducing joint ownership of permit/grant and also removing the need for permission for credit, mortgages, leasing etc. Further, caution is urged regarding reform scenarios which allows sale of LDO and LG (SP) lands as benefits of sale of land are less clear cut and also there may be potential costs. It is recommended that reform scenarios for outright sales of permits and grants are only considered after undertaking the minimum reform scenario first. It seems that productivity benefits of land sales are not clear and could even be counter-productive.