There was no immediate comment from the Tigers.
The Tigers said Monday they had killed more than 100 soldiers and had taken back territory lost to advancing government forces.
Both sides are known to make exaggerated claims about casualties they have inflicted on each other and independent verification is virtually impossible as journalists and aid workers are barred from the conflict area.
In January the Sri Lankan government pulled out of a 2002 Norwegian-brokered truce with the rebels, who have been fighting since 1972 for a state for ethnic minority Tamils separate from the majority Sinhalese community.
Security forces entered the town of Mulliyawalai near Mullaittivu, the main military headquarters of the Liberation Tigers of Tamil Eelam (LTTE), the defence ministry said.
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"Troops are now engaged in a fierce gun battle with the LTTE in the area," the ministry said in a statement. It said the Tigers had suffered heavy losses but did not give details of the latest fighting.