Women and children were the first to escape the town of Muttur, just a few kilometres (miles) from the northeastern provincial capital Trincomalee, after fresh shelling killed another five civilians early morning, they said.
A mass exodus followed later when pleas for a ceasefire to allow Muslims to attend Friday prayers were ignored by both sides, and attempts by the International Committee of the Red Cross (ICRC) to create a "humanitarian corridor" to the town failed, military officials said.
The Red Cross had wanted the government and the rebel Liberation Tigers of Tamil Eelam (LTTE) to give security guarantees to allow it to reach civilians trapped in Muttur but was refused, ICRC spokesman Sukumar Rockwood said.
"We have not been able to achieve the humanitarian corridor we wanted to establish for us to move freely and care for the affected people in Muttur," he said.
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International relief agencies with offices in the capital Colombo called for an immediate halt to the fighting so much