"There is a sea battle. We managed to destroy two boats. The fighting is going on and we are chasing them," Commander D.K.P. Dassanayake told Reuters.

A military statement said there were 15 LTTE (Liberation Tigers of Tamil Eelam) boats.

The latest clash comes ahead of peace talks between the rebels and the government on October 28-29.

Peace envoys are pushing both sides to stay the course for the planned talks but a surge in violence risks undermining the meeting in Geneva.

The military statement said the navy intercepted the rebel craft off Nagarakovil area on the Jaffna peninsula. The military said two rebel vessels were destroyed and other Tiger craft were damaged.

It said many rebels were wounded and two sailors suffered minor injuries. The military was firing shells and mortar bombs to prevent any rebel vessels landing along the nearby Jaffna coast.

There was no immediate comment from the LTTE.

Scores of people have been killed in the past few weeks in the island nation in fresh fighting that has left a 2002 truce in shreds and dimmed hopes of a breakthrough in Geneva, the first such dialogue since February.

Rebels fired mortar bombs at an army base in the eastern Batticaloa district late on Thursday, sparking army retaliation. There were no casualties, the military said.

Both sides also had artillery duels overnight on the Jaffna peninsula but no details of casualties were immediately available.

The continuing violence came as U.S. Assistant Secretary of State Richard Boucher is visiting the country, where Tamil Tigers have been fighting for an independent homeland since 1983 for the ethnic Tamil minority.

More than 65,000 people have died in the two-decade conflict.

Since July, violence has surged leaving around 1,000 people dead, including many soldiers, alarming Colombo's main donors.

"Richard Boucher wants to send a message there should be an immediate cessation of violence," U.S. embassy spokesman Evan Owen said. "It is more important to talk now than ever as Sri Lanka is in danger of going to all-out war."

On Wednesday, the rebels launched a sea-borne suicide raid on a naval base in the southern city of Galle, losing 15 cadres and killing one sailor, the first such attack on a town in the Sinhalese-dominated south.

Last week, dozens of rebels and soldiers were killed in battles in the north-east and hundreds of combatants wounded.

This was followed this week by a Tiger rebel suicide attack on a convoy in a north-central district, killing around 100 people, mostly navy sailors.

Security was tight in the capital Colombo with soldiers manning checkpoints and using cordon searches to look for suspected rebels.