Sri Lanka forces and Tamil Tiger rebels have kept up an exchange of mortar and artillery fire in the north-east, in the worst violence for four years.
The army says it repulsed a major rebel attack in Muttur, a town in Trincomalee district, early on Saturday.
Fighting between troops and Tamil Tiger rebels, which began in a dispute over water, has been spreading.
At least 20 civilians have been killed in more than a week of fighting. On Friday thousands of people fled Muttur.
The town has been cut off for several days. The Red Cross said it had been unable to reach the civilians after failing to obtain security guarantees.
Maj Upali Rajapakse, a military spokesman based in Colombo, told Associated Press news agency: "Our forces have repulsed a major terrorist attack, and based on our ground information we have learned that 35 bodies of terrorists are lying there."
The rebels had tried to capture a jetty that is a major sea supply link for the military, he added. There is no independent confirmation of the claim.
Meanwhile a Norwegian envoy, Jon Hanssen-Bauer, has met senior government officials in an effort to end the fighting. He is expected to meet rebel leaders on Sunday.
Casualties are hard to verify but the army says at least 23 soldiers have been killed since the military launched its latest offensive and the Tigers say they lost 25 fighters up until Wednesday.
The Red Cross said 22,000 people had been displaced by the fighting in Muttur. Most of the town's inhabitants are Muslims caught in the crossfire.
The dispute began when the Tigers closed the Maavilaru sluice gate to highlight Tamil grievances.
The government said it launched the offensive to save thousands of farmers who relied on the Maavilaru canal for vital water supplies.
Despite the upsurge in fighting both sides still say they are acting defensively and therefore within the conditions of a 2002 ceasefire.
The government has offered to hold talks with the rebels over the water dispute, but says the army will only stop fighting if the canal is reopened. So far the Tigers have not responded to the proposal.