Navy patrols attacked rebel craft early Thursday morning, the Tamilnet.com website said, adding that heavy artillery and mortar fire was also launched by the army.
No casualties were reported by Tamilnet in the sea battle, the latest in a series of recent naval clash between the government and Tiger gunboats.
The fighting erupted as Colombo and rebel Liberation Tigers of Tamil Eelam (LTTE) prepared for weekend peace talks in Geneva in a bid to halt months of bloodshed and revive a tattered 2002 truce agreement.
Around 3,000 people have been killed in 10 months of fighting, with both sides under heavy diplomatic pressure to push the peace process forward amid fears of all-out war.
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.