Twenty-eight soldiers have been killed and more than 100 wounded during an advance on Tamil Tiger positions, the Sri Lankan army says.
Civilians are fleeing the fighting in northern Jaffna
An army official said up to 130 rebels may have been killed, although this was denied by the Tamil Tigers.
The latest clashes broke out in the Muhamalai area of northern Jaffna peninsula on Thursday.
The government accuses the rebels of starting the fighting by attacking their frontline positions.
Government troops have been attempting to take rebel bunker positions, backed up by artillery and air strikes.
A spokesman said they had advanced 600m (1,980ft) since Thursday.
But Liberation Tigers of Tamil Eelam (LTTE) officials have denied any advance.
Army spokesman Brigadier Prasad Samarasinghe said the rebels attacked troops' frontline positions on Thursday with artillery fire. "We have been retaliating since then," he said.
He called the advance towards rebel strongholds "a limited operation to neutralise their artillery bases".
Troops were now consolidating their position, he told Reuters news agency. "We have suffered 28 killed and 119 injured," he added.
He said sources indicated 130 rebels had been killed, but the Tamil Tigers say they have suffered only a handful of casualties.
Rebel spokesman Seevarathnam Puleedevan said six fighters had died in the past three days and 13 others had been wounded.
He also denied the Tigers' bunkers had been overrun and said his cadres continued to resist army troops, the Associated Press reports.
Renewed fighting in Sri Lanka's 20 year civil war began in late July with air strikes on rebel territory amid a dispute over a blocked water supply.
A 2002 ceasefire between the government and rebels still technically holds, although both sides accuse the other of trying to force a full-scale return to war.
The fighting has effectively cut access by road to and from the Jaffna peninsula, leaving thousands of people trapped and running short of vital supplies.
Ships have been sent by the government and aid agencies to bring supplies to the area and evacuate civilians.