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COLOMBO, Aug 19 (Reuters) The government-held city of Jaffna, cut off by fighting between Sri Lankan forces and Tamil Tiger rebels, faced dwindling supplies and soaring prices today but no real panic, aid workers and witnesses from the remote northern town say.

One city resident told Reuters by telephone that prices for staples were up more than three-fold, with petrol selling for more than four times the going price before the latest fighting began three weeks ago.

A cash shortage also hit the city, with people rushing to withdraw money from local banks in anticipation of a possible evacuation, he said.

Witnesses and aid workers said gunfire and artillery shelling could be heard throughout the night and into the morning, but authorities eased recent curfew restrictions somewhat.

The Sri Lankan military said it had attacked Tiger naval units from the air along the Jaffna peninsula late yesterday.

''If this continues for another week, there won't be any more food,'' said Dilan, a pharmaceutical salesman who did not want to give his surname.

''People are withdrawing money from the banks, so there is no money to be had,'' he said by telephone. Communications with the region have been sporadic at best over the last week.

Police in Colombo set up checkpoints at all roads leading into the city as part of security for the South Asia Games, being held in the capital, a government spokesman said.

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