The Sri Lankan Army captured the strategically placed coastal town of Vaharai in the Eastern district of Batticaloa on Friday, and were moving north towards Kathirveli, the Defence Spokesman Keheliya Rambukwella said.
According to one report, over 331 LTTE cadres and 45 government troops were killed, but Rambukwella would not confirm the casualty figures.
"The troops entered the town around noon and captured the hospital. They are now on their way to Kathirveli," he said.
"The people of Vaharai have been liberated from the clutches of the terrorists," Rambukwella added.
Thousands were fleeing the town towards government-held areas, the military said.
The capture of the coastal road would prevent the LTTE from entering Batticaloa district from Trincomalee, and reinforce its outnumbered and beleaguered units in the Thoppigala jungles.
With the capture of Vaharai, the Sri Lankan forces could take Verugal, and link up with their units further north in Sampur, which they had captured earlier.
The LTTE did not acknowledge the loss of Vaharai but said that the Sri Lankan Army had been bombarding the hospital area of the town forcing 15,000 civilians who had taken shelter there to flee.