Tamil Tiger rebels staged a suicide attack against Sri Lanka's main southern naval base on Wednesday, killing at least two people and destroying three vessels, officials said.
The attack on the historic port of Galle -- a popular destination with foreign tourists -- came as foreign envoys pushed for the Sri Lankan government and the rebels to hold peace talks later this month.
The guerrillas, disguised as fishermen, forced their way into the tightly-guarded port in five boats, three of which rammed naval craft and exploded while one was blown out of the water due to naval fire, police said.
The fate of the fifth Tiger vessel was not immediately known.
Police said two sailors were killed in the attack and a total of 26 people were taken to hospital with injuries.
Fearing intercommunal violence in Galle, which lies in the heartland of Sri Lanka's Sinhalese majority, police imposed a curfew and opened fire and wounded three people who tried to attack Tamil-owned shops, a senior officer in the area said.
Defence spokesman Keheliya Rambukwella said he believed the Tigers chose to attack Galle to provoke a reaction against minority Tamils.
He said the rebel Liberation Tigers of Tamil Eelam (LTTE) broke through defences and barged into Galle, the country's third-largest city.
"Obviously they have come to Galle on a suicide mission," Rambukwella told AFP. "There was no damage to merchant shipping. It looks like they are keen to create a backlash."
The attack came two days after a huge suicide bombing against a naval convoy northeast of Colombo killed at least 103 people and wounded 150.
The government blamed the Tigers and accused them of targeting the navy on the ground because they could not stand up to it at sea. However, Wednesday's attack showed that the guerrillas were prepared to take the navy head-on.
Meanwhile, peace envoys from Japan and Norway were trying to convince the two sides to attend peace talks scheduled for later this month. The talks are aimed at restoring a 2002 truce.
Japan's Yasushi Akashi arrived in Sri Lanka Sunday while Norway's peacebroker Jon Hanssen-Bauer arrived on Tuesday to attempt to prepare an agenda for talks the two sides agreed to hold on October 28-29 in Switzerland.
There was no immediate indication of rebel casualties from Wednesday's attack, but police took two bodies to hospital, an official said, as the fighting was underway.
Police used loudspeakers to ask residents to leave their homes near the port and the historic Galle Fort area, a UNESCO world heritage site.
The city got its name from a Portuguese fleet that landed there in 1505.
Rambukwella said the military sent gunboats into Galle, 70 miles (110 kilometres) south of Colombo, to counter the LTTE attack.
The military maintains a base in the area and ammunition depots in Galle harbour, which is also used by commercial shipping companies.
Residents in Galle said at least 10 explosions were heard and that there was also gunfire in the area.
Sri Lanka's military has used Galle harbour to import arms and ammunition for security forces following threats to the bigger port of Colombo, which is a container hub for South Asia.
There was no immediate reaction from the Tigers, who in December 1997 detonated a truck bomb near the port in Galle, targetting the navy commander at the time.
In recent months, the military has discovered large quantities of explosives allegedly transported by the Tigers from the island's north to other areas.
Rambukwella said several other consignments of explosives may have gone undetected and that the Tigers could be using them in the island's south to stage more attacks.
The three decades of ethnic bloodshed in the tropical island nation has claimed over 60,000 lives.