The players' contracts expired at the end of February and they met Sri Lanka Cricket (SLC) officials to inform them they would not sign new ones by Saturday's deadline, said SLC secretary Nishantha Ranatunga.
"We have clearly explained to the players that we are willing to pay them 67 percent of our total revenue," Ranatunga told Reuters.
"We told them that unless they sign the contracts they would not be selected to play in the series against Bangladesh."
A similar pay dispute threatened to derail last year's Sri Lanka Premier League after the players said they would pull out of the tournament.
Sports Minister Mahindananda Aluthgamage delivered an ultimatum to the players and said the SLC would select a whole new team if they did not sign the contracts.
"The players are demanding 75 percent of the total revenue and if that is to be paid Sri Lanka Cricket will have to obtain a loan of 600 million rupees ($4.70 million)," Aluthgamage told Reuters.
"I have asked Sri Lanka Cricket to give the players time till Sunday for them to make up their mind, if they still refuse I have told them to go ahead and pick a new team and play the series."
Ken de Alwis, secretary of the Sri Lanka Players Association, told Reuters that senior players would meet the officials on Sunday to discuss the matter. ($1 = 127.5500 Sri Lanka rupees)