School holidays began early in Sri Lanka on Tuesday as a security precaution, a day after the first attack on a diplomat since a two-decade civil war began and a suspected Tamil Tiger front threatened to attack civilians.
Fighting continued to rage in the far north, as troops and rebels fired artillery at each other across a no-man's land, the military said, as it searched for rebel infiltrators amid fears the worst fighting since a 2002 ceasefire could escalate.
"Earlier we didn't have threats like this. I don't think they'd target us, but the safety of the children has to come first," said Sylvester Ranasinghe, Rector of St Joseph's College in Colombo.
The government said a deadly Claymore mine attack on a Pakistan High Commission convoy that killed 7 people and injured 17 on Monday was a rebel suicide attack. But witnesses said they saw no evidence of the remains of a suicide bomber at the site.
Pakistan is one of Sri Lanka's biggest arms suppliers.
The attack on the convoy came after Air Force jets bombed Tiger territory. The rebels said the raid killed 61 schoolgirls.
Nordic truce monitors said they only saw the bodies of 19 young men and women aged around 17-20, and while it did not appear to be a rebel camp, they had not ruled out the possibility they were receiving civilian defence training.
UNICEF said they did not have access to the dead.
Thousands of residents were still holed up in churches and homes as troops tried to smoke out rebels who have landed on an islet to the west of Jaffna town.
Residents stockpiled food as an indefinite curfew was briefly lifted. Most phone lines are down.
"Life is difficult, but at least we have shelter," said 40-year old plumber Patrick Selvam, who is sheltering with his wife and three children at a Catholic school in Jaffna. However he sneaks home each night to guard their belongings.
"I am worried about robberies," he said.
Aid workers estimate around 100,000 people are newly displaced in Sri Lanka's north and east after the worst fighting since a 2002 truce first erupted in the east three weeks ago.
In the capital Colombo, residents fear more attacks after two blasts in a week and the chilling threat from the suspected Tiger front organisation to start bombing civilians in the majority Sinhalese south.
The Colombo stock market fell 2.4 per cent on Monday as investors worried increased attacks could hurt industries like tourism and dent growth prospects for the $23 billion economy, but recovered some ground in early trade on Tuesday.
South Africa's cricket team wants to pull out of a triangular series with Sri Lanka and India and go home, team sources said.
Many foreign and local companies have put investment plans on hold until it becomes clear whether the island is sliding back into a full-scale war that has already killed around 65,000 people since 1983 and displaced hundreds of thousands.
"There are very real risks in Colombo and clients need to be aware of them," said Maria Kuusisto, South Asia Analyst for Control Risks Group in London.
"Our clients have to keep on operating in Colombo and we are not currently advising them to withdraw. The situation is escalating rapidly in the north and east and, therefore, our clients need to be flexible," she added.
UN Secretary-General Kofi Annan was "profoundly concerned" and urged the government and rebels to return to the negotiating table, allow aid agencies free access and let civilians leave contested areas, a spokesman said overnight.
The LTTE is infuriated at President Mahinda Rajapaksa's refusal to recognise their de facto state in the north and east as a separate homeland for ethnic Tamils, and have pulled out of peace talks indefinitely.
Both the Tigers and the government insist they still adhere to the ceasefire and that the other is breaking it, but monitors say the truce is dead on the ground and analysts say renewed peace talks are a dim prospect.