Naval craft blew up one boat after the three were spotted near a restricted zone before chasing and sinking the other two, leaving an unknown number of casualties.

"Navy foils an LTTE attack at Colombo harbour, one LTTE boat destroyed at 5:30 am," the defence ministry said in an initial statement on its website, before later reporting the other two boats had also been sunk.

Residents reported hearing gunfire near the southern end of the port's high security zone.

"We don't know how many people were in the rebel boats, but the navy confirmed they destroyed all three which were headed towards the port," a police official said.

Tamil Tigers staged a kamikaze-style seaborne attack against the southern naval port of Galle in October, killing a sailor and a civilian and damaging several naval craft.

Rebels entered the Colombo port in April 1996, damaging foreign ships with rocket-propelled grenades, but the guerrilla craft was blown out of the water by port security men before they could cause major damage.

In July 2001, the Tigers staged an even bigger attack on the island's only international airport near here, destroying six civilian jets on the tarmac and blowing up over a dozen military aircraft parked at the adjoining air base.

Since then, the authorities have clamped tight security on all ports in the island and banned fishing nearby to prevent guerrillas mingling among fishermen to stage attacks.

Police said there was confusion on Saturday because authorities had also planned security manoeuvres, with many believing the firing was part of a drill.

Tight security at the port was further stepped up with the employees allowed in after a thorough search, they said.

The incident came after the military captured the main rebel bastion of Vakarai in the island's east and stepped up operations against pockets of rebel resistance in the region.

Police also raised security in the island's south on Friday fearing revenge attacks, a police official said adding that 38 people were detained for questioning.

More than 3,800 people have been killed in the past year in escalating violence despite a truce that has been in place since February 2002. Norwegian-backed peace talks ended in failure in October.

The island's drawn-out Tamil separatist conflict, led by the LTTE, has claimed over 60,000 lives in the past 35 years and political attempts to resolve the conflict have ended in failure.