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Prabhakaran, 54, is in the island's northeastern district of Mullaittivu where his guerrillas are cornered by a massive military offensive, the BBC's Sinhala service said on its website.
Sri Lankan military commanders had said they were unaware of Prabhakaran's whereabouts and speculated that he already may have fled the island by boat.
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"It is malicious propaganda -- our leader is still with us -- our leader is giving leadership to our freedom struggle. He is with our people," the BBC quoted Tiger political wing leader B. Nadesen as saying.
In a satellite phone interview, Nadesan told the BBC Sinhala service that they would fight back despite the unprecedented loss of territory to government forces.
"In a liberation war it is normal for a force to lose territory and regain the same and achieve freedom," Nadesan said.
"In the past we have withdrawn many times and bounced back to achieve big victories."
Sri Lanka's navy has said it has stepped up patrols along the coast