State-run media said last week that Tamil Tiger rebels were preparing for attacks on the capital's harbour, oil storage complex and electricity supply in response to government attacks in the north and east.

Both sides suffered heavy losses earlier this month when the army advanced into rebel-held territory but was beaten back by a major counter-attack.

"The territory captured in the northern theatre after months of operations was lost in a single day when the Tigers hit back," defence analyst Namal Perera said. "The signs are that we are headed for a prolonged stalemate."

The fighting has raised the prospect of widening conflict in the island nation of 19.5 million that could severely damage the economy and isolate the government, former Sri Lankan diplomat Nanda Godage said.

"We could be heading in the direction of sanctions," Godage said.

The war is already affecting areas like tourism and aid flows as the economy slowed sharply in the first quarter, growing 6.1 percent compared to 7.9 percent in the same period last year while inflation averaged 19.7 percent, compared to 7.2 percent for the same quarter last year.

Britain and Germany have withdrawn some aid to the country although key Japanese envoy Yasushi Akashi said this month that further aid cuts would be counter-productive to efforts to resume peace talks.

The Tigers are already banned as a terrorist group in the United States, EU, and Canada and strong efforts have been made to stop them raising funds from the diaspora in those countries.

Despite international pressure, both sides have hardened their positions on peace talks and vowed intensified efforts to carry on the bitter ethnic conflict, which has claimed 60,000 lives in the past 35 years.

The result is expected to be a wave of violence, said Sunanda Deshapriya, director of the private Centre for Policy Alternatives think-tank.

"We will see more violence," Deshapriya said. "There is no mood in the country to compromise and resume talks."

Top defence officials have said they will need about two to three years to subdue the Liberation Tigers of Tamil Eelam (LTTE) led by elusive leader Velupillai Prabhakaran and force them to talks, an outcome the rebels say is impossible.