The fighting around the rebel-dominated village of Vakaneri was described by Sri Lankan government officials as the worst single incident since the June 17 sea battle in which 15 sailors and an estimated 30 rebels perished.
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The 12 soldiers were killed when the rebels fired mortar bombs at the village in the Trincomalee district, forcing retaliatory fire from the military which claimed the lives of four of the Tigers, the army said.
The International Committee of the Red Cross said they were asked by the rebel Liberation Tigers of Tamil Eelam (LTTE) to return the bodies of the soldiers to government authorities.
"We can confirm that the LTTE approached us to return 12 bodies of soldiers to the army," ICRC spokesman Sukumar Rockwood said, adding that the transfer would take place on Saturday.
Military officials said at least five soldiers were wounded in the mortar bomb exchange.
In a separate incident, a navy sailor was killed in the same province on Friday raising the overall toll on