By David Fox

COLOMBO, Sep 15 (Reuters) Resident's of Sri Lanka's besieged Jaffna peninsula enjoyed their most peaceful day in weeks today as government troops and Tamil Tiger rebels kept their distance after both sides conditionally agreed to talks.

Residents reported intermittent shellfire before dawn, but nothing like the pitched battles that have been fought for over a month that have cost hundreds of lives and seen tens of thousands flee their homes.

''The last three days have been the best we have had in three weeks,'' said one relieved resident. We hope it will stay like this.'' Norwegian mediators are trying to fix a date for direct talks between the government and Liberation Tigers of Tamil Eelam (LTTE) rebels after both sides announced this week they were ready to resume talks after a gap of five months.

But both also set conditions, with the government demanding a written guarantee that rebel attacks would cease, and the Tigers insisting on an end to army offensives.

The government and rebels accuse each other of trying to restart a two-decade civil war that has killed more than 65,000 people since 1983.

The LTTE pulled out of peace talks in April and a new bout of fighting erupted in late July, killing hundreds of troops, rebels and civilians in the worst violence since a 2002 ceasefire.

TIDE TURNS Both sides have launched offensives since then, although the tide appeared to be turning in the army's favour.

It has captured rebel territory near the strategic port of Trincomalee and says it has overrun Tiger frontline positions in the Jaffna peninsula in the far north.

Residents say the army has advanced less than a kilometre (mile).

While the military appears keen to press home recent advances before the monsoon rains next month, the government has been under pressure from international donors to come to the negotiating table.

While the diplomatic negotiations continued, residents of Jaffna heaved a sigh of relief today as the lull allowed many to return home or stock up on much needed supplies.

''Prices of bread, oil and fish have started coming down, bit by bit,'' said one Jaffna resident, who said three aid ships had now unloaded supplies -- the first for over a month.

Residents said goods that had been hoarded by traders when fighting erupted were also being put back on shelves in a sign of growing confidence.

Reuters AB RS1709