Navy patrols attacked rebel craft early Thursday morning, the Tamilnet.com website said, adding the army also launched heavy artillery and mortar fire.
No casualties were announced by Tamilnet in the sea battle, the latest in a series of recent naval clashes reported between the government and Tiger gunboats.
In a statement later Friday, Sri Lanka's navy denied any fighting had occurred, saying the Tamilnet reports were meant to mislead the international community ahead of weekend peace talks.
The reports came as Colombo and Liberation Tigers of Tamil Eelam (LTTE) rebel leaders prepared for negotiations in Geneva in a bid to halt months of bloodshed and revive a tattered 2002 truce agreement.
About 3,000 people have been killed in 10 months of fighting, with both sides under heavy international diplomatic pressure to push the peace process forward amid fears of all-out war.
Meanwhile, two more civilian men -- one bound with chains -- were gunned down by suspected Tamil rebels in north-east Sri Lanka Thursday night in the latest killings by death squads, the government said.
Tamilnet also reported heavy army shelling of LTTE-controlled areas in eastern Sri Lanka for several hours Thursday and overnight Wednesday, in a continuation of an artillery barrage that began earlier in the week.

Copyright AFP (Agence France-Presse), 2006