Sri Lanka's navy says at least 15 sailors have been killed and more than 30 Tamil Tiger rebels are believed dead after the rebels sank a navy patrol boat during a sea battle off the northern coast.
The navy says the boat was part of a convoy escorting a ferry carrying more than 700 troops. It says rebels rammed a boat loaded with explosives into the patrol boat.
The military retaliated by sinking at least three rebel vessels.
European truce monitors in Sri Lanka say one of their representatives was traveling with the soldiers when the attacks took place.
Earlier, the navy said Air Force fighter jets bombed Tamil rebel territory near their northern stronghold of Kilinochchi, following the clash.
The violence came a day after Japan's peace envoy to Sri Lanka Yasushi Akashi said relations between the Tamil rebels and the Colombo government are at their worst since their 2002 ceasefire.
Some information for this report was provided by AFP, AP and Reuters.