At least 20 Tamil Tigers were killed in a clash with the Sri Lankan Navy off the island's northern Jaffna peninsula on Friday, the military said.
Two sailors were also wounded in the fierce clash that broke out on Friday evening, the latest in a series of sea battles in recent months.
According to the military, the Navy exchanged fire with a flotilla of Liberation Tigers of Tamil Eelam after the rebels attacked naval gunboats. An upsurge in violence has killed more than 2,300 people and threatens peace talks planned for later this month.
Sri Lanka's Navy has been the target of two suicide bombings this week, including an attack on Monday in the northern town of Habarana that killed at least 115 sailors waiting to board buses for home.
On Wednesday, 15 suspected rebel suicide bombers travelling in at least five boats attacked a key naval base in the southern port city of Galle, detonating powerful explosions that killed two people and injured 26.
The authorities have later recovered the bodies of nine rebels involved in the attack in Galle.
Meanwhile, the United States has ruled out any immediate joint military exercises with Sri Lanka even as the island's security situation worsened with stepped up Tamil Tiger attacks.
US Assistant Secretary of State for South and Central Asian affairs Richard Boucher said a joint exercise had been deferred, but did not say why or for how long.
"We have been talking about an exercise, especially on humanitarian aspects, but for the moment our plans have been deferred," he told reporters in Colombo at the end of two-day visit.
"We will do such an exercise in the near future, but we are not going to do it right now for a variety of operational reasons," he added.
A local press report had said the US was planning a joint naval exercise with Sri Lanka's military involving 1,000 marines very soon. Boucher said the US was encouraging both the LTTE rebels and the Sri lankan government to 'lower the temperature' and make a 'new beginning' in their peace efforts.
He said they were also hopeful that the two sides will be able to have a successful round of talks in Switzerland later this month. Tamil Tiger rebels staged a suicide attack against a naval base in the island's south, killing two people on Wednesday, two days after another suicide attack that killed 115 people, mostly sailors elsewhere in the island.
Last week, the Tigers resisted a military offensive, killing at least 133 soldiers.
During his previous visit in June, Boucher pledged 'tangible military cooperation' with Sri Lanka but warned Colombo against a return to war with Tamil rebels.