The Sri Lankan military says it has sunk 12 Tamil Tiger boats and killed 80 rebels in a sea battle off the northern Jaffna peninsula.
There is no word from the Sea Tigers on their casualties
The Tamil Tigers have not yet confirmed any casualties but said two government boats had been sunk off Kankesanturai.
Witnesses said the battle had raged all night and hundreds of civilians sought refuge in schools and churches.
The sides have been in open conflict for the past month but neither has officially withdrawn from a 2002 truce.
'People are suffering'
Sri Lanka's defence ministry said five of the rebel Sea Tiger boats had been suicide vessels laden with explosives.
The navy said 20 rebel boats had attacked a patrol near Kankesanturai harbour.
It said two government boats were slightly damaged and two sailors wounded.
However, the pro-Tamil Tiger website TamilNet said two navy fast attack craft were sunk and another damaged. Its sources said about 30 navy sailors were missing.
Kankesanturai harbour is cut off from the rest of the country by rebel lines and the Sri Lankan military takes in supplies and reinforcements by sea.
Local priest, P Iruthayathas, told Associated Press news agency that 500 families had taken shelter during the night.
"People are suffering. They are unable to properly carry out their livelihood, fishing, and so they don't have money. Even the dry rations given free by the government are not sufficient," he said.
Meanwhile, the Red Cross has called on both sides to allow humanitarian aid to reach the isolated Jaffna peninsula.
The aid agency's most senior official for South Asia, Reto Meister, said a quarter of a million people in Jaffna were running dangerously short of basic items such as food and medicine.
The killing of 17 aid workers in Sri Lanka a month ago has prompted all aid agencies there to reassess the risks they are taking.