Sri Lanka says sinks arms ship, Tiger boss to speak

COLOMBO, Nov 27 (Reuters) Sri Lanka's navy sank a trawler carrying a suspected Tamil Tiger arms shipment off the island's northwest coast today, hours ahead of the rebel leader's annual address expected to chart the course for more war.

The military said the navy came under fire from the 45-ft trawler in open seas, returned fire and the boat exploded, the latest in a string of such clashes in recent weeks as a new chapter in the two-decade civil war escalates.

''The navy retaliated and the boat blasted,'' said a military spokesman, asking not to be named. ''We believe it belonged to the LTTE and believe it was carrying weapons and explosives judging by the blast.'' He said the six-strong crew perished.

Velupillai Prabhakaran, leader of the Liberation Tigers of Tamil Eelam (LTTE), was due to make his annual speech from a secret location in the rebels' northeastern stronghold today, in which he was widely expected to threaten more conflict.

From financial markets to shopkeepers, diplomats to weary refugees displaced by air raids and battles, all eyes will be on the shadowy leader's speech, seen as setting the path for the Tigers' military and political strategy for the coming year.

Last year, Prabhakaran -- who is revered within the rebel group as ''National Leader'' of the homeland for minority Tamils they say they are fighting for -- gave the government a year to find a political solution to the war or face renewed struggle.

President Mahinda Rajapakse has rejected the idea of a separate Tamil homeland out of hand, and more than 3,000 civilians, troops and Tiger fighters have died in a string of military clashes and ambushes during his first year in office.

TRUCE IN TATTERS A 2002 truce lies in tatters, although both sides are adamant it still holds and accuse the other of trying to reignite war.

In Colombo, troops tightened security and checked cars and shops today amid fears of renewed attacks on the capital during Prabhakaran's Heroes' Day speech to commemorate more than 18,700 slain rebel fighters.

Witnesses in Tiger territory said roads had been decked out with red Tiger flags emblazoned with roaring golden tigers and crossed rifles and pictures of Prabhakaran in characteristic Tiger-striped fatigues and cap, sidearm at the ready.

''I think he is going to catalogue the causes for failure of the peace process, and no doubt he will set the stage for more war,'' said Iqbal Athas, an analyst with Jane's Defence Weekly.

A new round of abortive peace talks broke down a month ago, and many fear that a war that has killed more than 67,000 people since 1983 will escalate and punish the 23 billion dollars economy.

In the northern army-held Jaffna peninsula where 500,000 residents, almost all of them Tamils, are cut off from the rest of the island by rebel lines and survive on rations brought in by sea, many residents fear they will be displaced yet again.

''We have gone back to the pre-2002 (ceasefire) era,'' said 42-year-old Pragash Shunmuganathan, who had to close his video and television repair shop in Jaffna for lack of customers as economic hardships in the besieged peninsula bite.

''Today we are starving. There is no food, no employment,'' he added. ''War seems to be the only remedy.'' REUTERS BDP BST1422