Sri Lanka said on Tuesday it had destroyed four Tamil Tiger boats trying to escape government soldiers closing in on the rebels' last base in the northeast of the island.
Military sources said around 16 guerrillas were killed in the battle off Mullaittivu, the last town in Sri Lanka still in the hands of the Liberation Tigers of Tamil Eelam (LTTE).
The military has stepped up a naval blockade in the area to prevent any rebel leaders from leaving the country.
Reeling under the military's biggest ground, air and sea offensive in more than three decades of fighting, the Tigers have seen their territory rapidly shrink, with their political capital of Kilinochchi falling earlier this month.
Sri Lanka's army chief, Lieutenant General Sarath Fonseka, said over the weekend that the Tiger leadership, including its elusive leader Velupillai Prabhakaran, may have already fled by sea.
The guerrillas still control a 40-kilometre (25-mile) stretch of coastline in Mullaittivu and the navy has said it has set up four layers of naval barriers to restrict guerrilla boat movements.
In Tuesday's pre-dawn sea battle, the defence ministry said the navy had intercepted rebel boats trying to flee the area.
It said a navy fast attack craft was damaged when a Tiger suicide boat detonated next to it, but that government sailors had forced the Tigers "to retreat and abandon the mission."
There was no immediate comment from the rebels.
Sri Lanka's government pulled out of a Norwegian-brokered truce with the rebels a year ago, and has since embarked on its most determined effort yet to dismantle the LTTE's northern mini-state once and for all.
President Mahinda Rajapakse has said that his troops are on the verge of victory and he will not accept anything short of total surrender from the Tigers.
Tens of thousands of people have been killed in the drawn out separatist conflict.