The rebel Liberation Tigers of Tamil Eelam (LTTE) and security forces traded long range barrages along a frontline in the Jaffna peninsula, the pro-rebel Tamilnet.com website said.

It said the military had retreated from some of their positions and the Tigers had advanced a "significant distance" following the fighting that lasted over two hours.

"The LTTE has advanced significant distance towards the Sri Lanka army's forward defence line (FDL) and, the Sri Lanka army has been forced to move back from their FDLs," Tamilnet quoted its sources as saying.

However, the military spokesman in Colombo, Brigadier Prasad Samarasinghe, denied any rebel advance. He accused the Tigers of initiating the battle.

"We have not moved back an inch," Samarasinghe said, adding that security forces had successfully repulsed the dawn attack.

Samarasinghe said the main entry and exit point for civilians going to the government-held part of the Jaffna peninsula remained open despite the early morning fighting.

He said there were no casualties among security forces but there was no immediate word from the Tigers about casualties on their side.

Earlier this month, the military briefly shut the "frontier post" following a similar artillery exchange.

Elsewhere in the island's restive east, a policeman was shot dead by the Tigers, the military said.

The clashes came a day after President Mahinda Rajapakse said he had ruled out a military option to resolve the long-running conflict that has claimed over 60,000 lives since 1972.

Sri Lanka's Tamil Tiger rebels warned on Tuesday that a European Union ban that diplomats say will freeze their assets would shake the island's teetering peace process, but said they remained committed to a truce.

The Tigers had earlier said proscription would deter them from returning to talks aimed at permanently halting a two-decade civil war and would "exacerbate the conditions of war".

But they now want the EU to sanction the government, which they accuse of helping a band of former comrades to attack them.

"This ban is not going to help to promote the peace process," S. Puleedevan, head of the Tigers' peace secretariat, told Reuters from the northern rebel stronghold of Kilinochchi.