Canada's move is a diplomatic problem for the rebels
Sri Lankan officials and Tamil Tiger rebels are expected to meet in Geneva later this month for a second round of talks on their ceasefire agreement.
The planned meeting is under the shadow of violence which has risen in recent days in northern and eastern parts of Sri Lanka.
It also follows a decision by Canada to outlaw Tamil Tiger rebels in that country.
The move was long expected but it has come at a time when the Sri Lankan peace process is entering a crucial stage.
For years, the Liberation Tigers of Tamil Eelam (LTTE) have worked hard to portray themselves as freedom fighters and theirs as a struggle for Tamil rights in Sri Lanka.
Although the Tigers are banned in the UK, it is a well-known fact that their front organisations, using different names, carry on fund-raising
Their front organisations overseas raised funds for their activities and for the humanitarian needs of Tamils affected by the war in Sri Lanka.
Despite the rebels' chequered past, the international community encouraged them to enter into peace negotiations with the Sri Lankan government, especially after the Norway-brokered ceasefire agreement in 2002.
While the talks continued, countries like the US, UK and India did not lift the ban on the LTTE.
When the new Conservative-led Canadian government took office in January this year there were clear signs that it might give serious consideration to including the Tamil rebels on its list of terrorist groups.
And then earlier this week the announcement came.
"The decision seems to be based more on what's happening among the Tamil community in Canada," says Canada-based Sri Lankan analyst DBS Jeyaraj.
"Certain actions of the Tamil rebel representatives here might have also led to this decision."
It is estimated that there are about 250,000 Sri Lankan Tamil expatriates currently living in Canada.
Civilians in Sri Lanka fear a return to war
For years, the LTTE and its front organisations were actively engaged in promoting their cause and fund-raising.
But there were reports of violence among Tamil gangs and, recently, Human Rights Watch criticised what it said was forceful fundraising by the LTTE, a charge the rebels denied.
The Canadian government's decision to outlaw Tamil Tiger rebels may not have any serious impact on their activities inside Sri Lanka or in areas under their control - but their image in the international arena seems to have taken a jolt.
Talking prior to the official proscription by Canada, SP Thamilselvan, the leader of the LTTE's political wing said "the move could totally weaken the peace process".
He also said it would also "offend Tamil people living in Sri Lanka as well as in Canada".
The US proscribed the LTTE in 1997 and the UK followed suit in 2000.
Following the assassination of former Sri Lankan foreign minister Laxman Kadirgamar, there were expectations that the European Union might also ban the rebels.
In the end, the EU issued a travel ban instead, saying official rebel delegations were not welcomed in EU capitals.
But how effective is the Canadian ban likely to be?
Although the Tigers are banned in the UK, it is a well-known fact that their front organisations, using different names, carry on fund-raising.
They say most of the money is being used for humanitarian work in the war-torn northern and east of Sri Lanka.
The Tamil Rehabilitation Organisation (TRO) is considered to be the humanitarian arm of the LTTE and it has many branches in many Western countries.
Expatriate Tamils have been contributing money to the TRO.
But the TRO ran into trouble in the UK late last year when the government-run Charity Commission removed it from the list of charities following reports that the TRO "had not been able to account satisfactorily for the application of charitable funds of the charity".
The commission's actions followed months of investigation by the authorities and "the results of the review suggested that the TRO Sri Lanka liaised with the LTTE in determining where funds could be applied".
Although the TRO in Britain came under fire, many Tamils praise the swift humanitarian work it carried out in Tamil areas of Sri Lanka soon after the 2004 tsunami disaster.
With no government aid forthcoming immediately, it was left to TRO officials to carry out urgent relief and support, they say.
Given the poor living conditions in the north and east of Sri Lanka, some argue that fund-raising for humanitarian work is still vital.
Some Tamils say there is still hope as the LTTE's front organisations have not been banned in Canada and they could raise funds for genuine humanitarian work back in Sri Lanka.
The ban may not derail the Sri Lankan peace process altogether.
Probably, it may go well among Sinhala hardliners and those opposed to the LTTE.
At the same time, Tamil rebels may not feel threatened or intimidated by this proscription as they have seen this before.