The Sri Lankan military says troops have captured a key Tamil Tiger stronghold in the east of the country.
The army is seeking to disrupt Tamil Tiger supplies
Thousands of Tamil civilians are fleeing the town of Vakarai, which has been the focus of heavy fighting for several weeks.
Aid agencies say they are worried about the fate of the civilians, many of whom were taking shelter in a hospital in Vakarai affected by the fighting.
The fall of Vakarai would badly disrupt Tamil Tiger supplies to the north.
There has been no comment from the Tigers on the military's claim.
"The troops are in control of the town of Vakarai," military spokesman Prasad Samarasinghe told the BBC's Sinhala service. "Thousands of civilians are coming across to government-controlled areas."
The defence ministry said at least 45 members of the security forces and 331 rebels had been killed in the battle for Vakarai, which began in October.
The BBC's Roland Buerk in Colombo says Tamil Tiger fighters fled into the jungle and by boat as government forces moved in.
The pro-Tamil Tiger website Tamilnet says that earlier the military stepped up shelling of the hospital in Vakarai, "forcing 15,000 civilians to flee... the hospital area".
The military has accused the Tigers of using civilians in the hospital as human shields and using the hospital as "an artillery launching pad".
Before Friday's developments, more than 30,000 civilians had already left Vakarai in recent weeks to escape the conflict.
The government says thousands more moved into areas under its control on Friday.
The Tigers want an independent homeland for Tamils
The United Nations Refugee agency, UNHCR, says more may remain in Vakarai and it is extremely concerned for their safety.
The UNHCR is calling on all sides to respect human rights.
Our correspondent says Vakarai was a key stronghold of the Tigers, used as a transit point between Sri Lanka's east and the north.
The Tigers had their own police force and civil administration in the area.
In recent months the government has been stepping up military activity in the east, aiming to seize pockets of territory held by the Tigers.
About 65,000 people have been killed in Sri Lanka's civil war.
The Tigers are fighting for a separate homeland for the country's 3.1m minority Tamils, who say they have suffered decades of discrimination by the majority Sinhalese.
Although both sides say they are adhering to a Norwegian-brokered 2002 cease-fire, violence has escalated since late 2005, with more than 3,600 people killed last year alone.