The Sri Lankan government has launched air strikes on Tamil Tiger positions after at least 99 people were killed in an attack on a military bus convoy.
The buses carried navy servicemen on leave, the military said
The military said at least 100 people were also injured in what it said was a Tamil Tiger suicide attack on the convoy in northern Sri Lanka.
An explosives-loaded truck was rammed into buses of troops, officials said.
The rebels did not confirm or deny the attack, the worst such blast in the conflict, but said it was justified.
The buses, targeted at a site near the town of Habarana, 190km (120 miles) north-east of the capital Colombo, were carrying unarmed navy servicemen on leave, the military said.
The incident comes after at least 129 Sri Lanka soldiers were killed and 300 injured in fighting on Wednesday - the worst single day of casualties for the military since a ceasefire was signed in 2002.
Correspondents say the violence could derail peace talks due to take place in Geneva, Switzerland, at the end of the month.
A spokesman for President Mahinda Rajapakse called the attack as "cowardly", pointing out that it took place "in a civilian area away from the area of armed confrontation".
DESCENT INTO VIOLENCE
16 October 2006: 99 killed in suicide attack on navy convoy
11 October 2006: 129 soldiers die in fighting between army and Tamil Tigers
4 September 2006: Troops take control of a crucial area near Trincomalee
14 August 2006: 61 schoolchildren killed by air force bombs, rebels say
7 August 2006: 17 local employees of a French charity shot dead in the town of Muttur
26 June 2006: A suspected suicide bomber kills a top Sri Lankan general near Colombo
15 June 2006: At least 64 - many children - die in mine attack on bus
During the retaliatory air strikes against Tamil Tiger positions in the north, an air force fighter jet crashed in a lagoon about 30km (18 miles) from Colombo, although the pilot ejected to safety, the military said.
UN Secretary General Kofi Annan was "alarmed by the upsurge of violence in Sri Lanka in the past several months, including today's appalling suicide bombing", said his spokesman, Stephane Dujarric.
Rasaiah Ilanthirayan, a spokesman for the Tamil Tigers, said: "To this moment, I do not know for sure who did this."
But he indicated that it could have been the Tigers.
"There is a possibility of that kind of targeting, but this particular target, I am not sure until I get information from the Eastern Commander," he told the BBC.
Nearby hospitals treated victims of the blast (Picture by Athula Bandara)
A Tamil Tiger spokesman told Reuters news agency that Sri Lankan planes had bombed a village near the north-eastern town of Mullaitivu late on Monday and several civilians were feared killed.
The convoy attack comes shortly after Japan's peace envoy to Sri Lanka, Yasushi Akashi, met President Rajapakse in Colombo.
Later in the week, he is due to meet senior Tamil Tigers in the north of the island and envoys from Norway and the US are scheduled to arrive.
The BBC's Dumeetha Luthra in Colombo says that given the climate of violence, there is little optimism about what is likely to be achieved in the Geneva talks.
At least 2,000 people have been killed in violence this year in Sri Lanka, the military and ceasefire monitors say.
Before the 2002 ceasefire, more than 60,000 people were killed in two decades of civil war.
The Tamil Tigers are fighting for an independent homeland in the north and east of the country, and claim that ethnic Tamils have suffered decades of discrimination at the hands of Sri Lanka's Sinhalese majority.