Tamil Tiger rebels have carried out a suicide attack on a naval base in the southern Sri Lankan tourist city of Galle, the military says.
Galle is now under curfew after the harbour attack
Two rebel boats exploded damaging navy vessels. Shots were also fired. At least two people died, officials said. The town is under curfew after unrest.
It is the first time a tourist hub has been caught up in the latest fighting.
On Monday, nearly 100 people, mostly sailors, were killed in the deadliest suicide bombing of the long conflict.
Air force jets carried out more raids on suspected rebel targets in the east of the island after the attack on the naval base.
The rebels said one civilian had been killed in a raid near Batticaloa. Sri Lanka's military confirmed the raid, but denied civilian areas had been attacked.
Rebels infiltrated the Dakshina naval facility at Galle hiding between fishing boats in the adjoining harbour, a navy spokesman said.
Leading tourist hub - Galle Fort is Unesco world heritage site
Name comes from Portuguese fleet that landed in 1505
Harbour used by naval and commercial shipping
Leading Sri Lankan cricket venue
Town badly damaged in 2004 Asian tsunami
One boat was destroyed and two others exploded, damaging some naval equipment.
Another two vessels made it to shore where suspected rebels landed. Fighting went on for about an hour and a search operation for rebels was launched.
The defence ministry said two people had been killed, one of them a sailor. At least 26 others, civilians among them, had been wounded, a statement said.
Two more sailors are believed to be missing.
"After the explosions, everybody started shooting. It was terrifying," local resident, Ramile Walgamage, told the BBC News website.
"The navy boys were running around engaged in a gun battle and not fully dressed because it was early morning."
As news of the raid spread, some members of the majority Sinhalese community attacked shops belonging to minority Tamils, police said.
A curfew has been imposed.
A local hotel manager, Mr Shamim, told the BBC News website that the city was full of policemen and soldiers enforcing the curfew.
Security personnel are on high alert in the city
"Our guests have not stepped out today. It is all very quiet outside. We hope the situation will improve later in the day," he said.
Major Upali Rajapakse, a senior media co-ordinator with the Sri Lankan government in Colombo, played down reports of trouble: "There was a minor incident when some rowdies wanted to set fire to a shop. We have controlled the situation. There are no riots."
Galle's police chief has denied reports that his officers opened fire to prevent rioting.
The Tamil Tigers have made no comment on the latest incident.
Galle, which is some 100km (70 miles) south of the capital, Colombo, is a popular destination for tourists. It also suffered badly during the Asian tsunami.
The BBC's Dumeetha Luthra in Colombo says the latest attack is a worrying development for the country's tourist industry, as such areas had been largely free of violence.
At least 2,000 people have been killed in violence this year in Sri Lanka, the military and ceasefire monitors say.
Galle suffered badly during the Asian tsunami of 2004
Monday's bombing resulted in more fatalities than any other suicide attack in Sri Lanka's long and bloody civil conflict.
A military bus convoy was attacked near the town of Habarana, 190km (120 miles) north-east of the capital Colombo.
The rebels did not confirm or deny carrying out the attack but said it was justified.
Both the government and Tamil Tigers say they will attend peace talks in Geneva next week, although few expect a breakthrough.
Before a ceasefire was agreed in 2002, 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.