About a dozen rebel boats engaged the Sri Lankan navy off the coast of Mannar island shortly after dawn Saturday, defence ministry spokesman Prasad Samarasinghe said.

He said the navy destroyed eight Tamil Tiger boats for the loss of three of their own craft.

"At least 30 Sea Tigers were killed," Samarasinghe said in a statement.

A navy spokesman said 12 sailors were believed killed in the initial attack although only four bodies had been recovered. Another three soldiers went missing presumed dead when a patrol craft approaching the area capsized, he said.

Government minister Keheliya Rambukwella said six civilians were killed and more than 20 wounded when they were caught up in the cross fire in Mannar.

"We have launched an investigation into the killing of the civilians," Rambukwella said while denying that the military had targeted civilians during the early morning confrontation.

The pro-rebel Tamilnet.com website said at least one woman was killed and another 44 people wounded when troops lobbed a grenade into a church on the Mannar island where civilians had taken refuge.

Samarasinghe denied that the troops carried out the attack and in turn accused the Tigers of targeting civilians.

"Still the government is committed to the peace process but... the government will take every possible step to safeguard national security," he told a press conference.

Sri Lankan jets pounded rebel targets on Thursday and Friday in retaliation for an attack on a civilian bus that killed 64 people in the worst violence since a 2002 cease-fire, raising fears of an imminent return to a two-decade civil war.

Meanwhile, the Tigers, who deny Thursday's bus bombing, threatened retaliation if air force bombing restarted.

They said that if air strikes near the northern rebel stronghold of Kilinochchi resumed they would retaliate.

"We have clearly told the Norwegian facilitators and (the Nordic truce monitoring mission) SLMM that if the air strikes continue the LTTE will definitely take retaliatory action," head of the rebel peace secretariat S. Puleedevan told Reuters.

The government said air force attack helicopters flew to Mannar and took part in the clash but there were no other air strikes. Rebels and officials said other front lines were calm.

The government said it had captured three Tigers in diving gear as they came ashore on the island's west coast just north of the capital Colombo and not far from the beach resort of Negombo. Two of the men took cyanide and were taken to hospital.

Tiger fighters wear poison capsules around their necks and are renowned for committing suicide to avoid capture. The military said they were captured with magnetic mines they had intended to attach to the hulls of naval patrol boats.

Two explosions took place underwater near the beach as the men were arrested, the military said, but no-one was hurt.