Prabhakaran, 54, and his eldest son Charles Anthony have blended in with about 100,000 civilians trapped in the conflict zone, the state-run Sunday Observer said.
The report said two guerrillas arrested last month disclosed that their leader had not fled despite widespread speculation he had escaped by sea.
"The Tiger leader and his son are still living among the civilians in Puthukkudiriruppu and are engaged in making more and more terror plans to reverse the military victories," the Observer quoted the two rebels as saying.
Last month, Sri Lankan military commanders said Prabhakaran may have left the island as his retreating forces were driven back into a small area of jungle.
Sri Lanka's navy has stepped up patrols along the island's north-eastern coast to track any attempts by rebel leaders to escape, while India and Malaysia have put ports on alert.