Tamil Tiger rebels say they have killed 35 Sri Lankan sailors in a sea attack on a navy base on the Jaffna peninsula in the north of the country.
The Sea Tigers are said to be based around Mullaitivu
A rebel spokesman said they overran the base on the island of Delft and the fighting lasted only 20 minutes.
Confirming the attack, a navy spokesman said the rebel claims were exaggerated and four sailors were killed.
Despite a truce still being in place on paper, Sri Lanka has been sliding back towards civil war.
More than 4,000 people have been killed since late 2005.
"The target was a naval camp south of Delft, and the fighting lasted only 20 minutes and we completely overran the camp," rebel spokesman Rasiah Ilanthirayan told the Associated Press news agency.
"Later, our naval attacking unit found 35 bodies," he said.
But Sri Lankan military spokesman Brigadier Prasad Samarasinghe told Reuters: "The Tigers have attacked a small naval detachment on Delft island in Jaffna. Less than 10 sailors are dead.
"We didn't even have 35 people there. That's totally false propaganda," he said. Later he put the number of sailors killed at four.
Earlier, a navy spokesman said in a co-ordinated land and sea attack, 15 rebels boats targeted the base, but one was sunk.
"We are confronting the LTTE [Liberation Tigers of Tamil Eelam] on land and at sea. There were 15 boats, including three suicide boats, off Delft island in Jaffna," said navy spokesman Commander DKP Dassanayake.
"We have destroyed one boat," he said.
Meanwhile, an army bus has been hit by a bomb blast in Colombo wounding four soldiers, one of whom later died in hospital. Three civilians were also injured, the military says.
The government said the device was left on a motorcycle parked on the side of the road and blamed the Tamil Tigers.
The rebels, who want a homeland for the island's Tamil minority, have said they were not responsible.
A soldier was killed in Thursday's attack in Colombo
Initially, the military said a suicide bomber on a motorcycle carried out the attack, but later said it was more likely to have been a roadside bomb, possibly detonated by remote control.
The government has blamed the Tamil Tigers, who have said they were not responsible.
It says that more than 500 rebels have been killed in the past four months in fighting in and around rebel-held territory in the north of the island.
But the Tigers dispute the figure, and the Sri Lanka Monitoring Mission set up to observe the ceasefire says both sides routinely exaggerate the other's losses, says the BBC's Roland Buerk in Colombo.
Most of the time, numbers cannot be independently verified.
Senior government figures have said they aim to defeat them on the battlefield within two to three years.