The insurgents attacked a bunker along the defensive lines outside Vavuniya, the last government-held town before rebel territory in northern Sri Lanka, killing a police officer, military spokesman Lt. Col. Upali Rajapakse said.
The fighting took place a day after the military said at least 13 insurgents had been killed in two days of fierce battles along the front lines in the north - news that heightened concerns that the renewed ethnic war was entering an even bloodier phase.
Britain, which had agreed to give US$5.9 million (EUR4.3 million) to help Sri Lanka pay down its debts to the World Bank, has suspended the program after making only half the payments, a spokesman for the British High Commission in Colombo said on customary condition of anonymity.
The payments will resume if a series of conditions are met, including no unjustified increases in military spending and no instigations of hostility, the official said.
The aid suspension came as a senior British diplomat planned a trip to war-torn northern Sri Lanka to meet rebel leaders and urge them to return to peace talks.
British Deputy High Commissioner to Sri Lanka Lesley Craig had been due to travel Thursday to Kilinochchi, the main rebel-held city, but the trip was postponed, the spokesman said.
While no reason was given for the delay, he said Craig would travel soon to meet with leaders of the Liberation Tigers of Tamil Eelam, as the rebels are formally known.
The Sri Lankan government recently barred the Norwegian ambassador from making a similar trip to Kilinochchi.
Norway helped broker a 2002 cease-fire between the government and rebels, and has continued to serve as a mediator as sporadic fighting has intensified in the past 18 months.
The cease-fire officially remains in place although the fighting has worsened. Both sides insist they respect the truce and are only responding to the other's aggression.
The government has already ousted insurgents from bases in eastern Sri Lanka, and officials say they plan to make a push soon into the rebels' heartland in the north, where they run a mini-state complete with border guards, schools and traffic police.
The rebels have been fighting since 1983 for a separate homeland for Sri Lanka's 3.1 million Tamils, a largely Hindu minority concentrated in eastern and northern Sri Lanka. The Tamils have faced decades of discrimination from the predominantly Buddhist Sinhalese, who comprise a majority of the Indian Ocean island nation's 19 million people.
At least 65,000 people were killed before the 2002 cease-fire. Air raids, bus bombings, suicide attacks and jungle clashes have left an estimated 4,000 more dead since December 2005.