Maj Gen Kamal Gunaratne, a top Sri Lankan commander in the Wanni region said, "With authority I can tell you that no such incident has happened."
He added that an inquiry was conducted into the report published in The Observer saying that the practise took place in the refugee camps during the final phase of the island country's offensive against the rebel Liberation Tigers of Tamil Eelam (LTTE).
The inquiry found nothing, Gunaratne said adding that if such allegations were there against forces or government officials, they had the liberty to complain to authorities.
He said that the army and the soldiers were highly disciplined and took part in humanitarian operations.
The British Sunday paper had reported that Lankan soldiers at the refugee camps traded food for sex.
The report quoted refugees who revealed that besides this practice, they were put through other kinds of tortures such as being forced to kneel for hours in the sun.