Troops fought their way into the separatist stronghold of Kilinochchi deep in the north, dealing a heavy blow to the Liberation Tigers of Tamil Eelam (LTTE). Details of casualties from the fighting were not immediately available.

"It was the constant dream of all Sri Lankans, whether Sinhala, Tamil or Muslim, who are opposed to separatism, racism, and terrorism, and have always, sought peace, freedom and democracy," President Mahinda Rajapaksa said in a nationally televised address.

"Today our heroic troops have made that dream a reality. A short while ago, our brave and heroic troops have fully captured Kilinochchi that was considered the main bastion of the LTTE."

Within an hour of his statement, a suspected suicide attacker struck near the Sri Lankan Air Force headquarters, a spokesman at the Media Centre for National Security said.

Hospital officials said 37 people were wounded in the blast.

The military said all three of those killed and 12 of the wounded were air force personnel.

The Tigers, who have been fighting for a separate homeland for minority Tamils in the east and north of the island for a quarter of a century, could not immediately be reached for comment.

Military officials say the rebels have in the past hit back with bombings in the capital and elsewhere whenever they have come under pressure on the northern frontline.

Analysts said the capture of Kilinochchi could make the capital and far south more vulnerable.

"Particularly after the humiliating defeat at Kilinochchi they will try to use their striking capability outside the theatre of conflict in a bigger way," said Iqbal Athas, an analyst with Jane's Defence.

Kilinochchi, in the Northern Province, has long been the centre of the Tamil fight for an independent homeland, which has seen more than 70,000 people killed in a bitter civil war since 1983.

Pro-rebel website www.tamilnet.com said the Tigers had moved their headquarters further northeast before the town fell.

"The Sri Lanka Army (SLA) has entered a virtual ghost town," the website said. "The Tigers, who had put up heavy resistance so far, had kept their casualties as low as possible in the defensive fighting."

FLAGS AND FIRECRACKERS

The fall of the rebels' de facto capital was greeted with the bursting of firecrackers in Colombo. Others waved the national flag as they drove through the streets of the capital.

"The capture indicates very clearly that the LTTE's attempt to build up a quasi-state has now collapsed," Pakiasothy Saravanamuttu, a political analyst, said.

Sri Lanka's military has been closing in on Kilinochchi since September. Over the past month, it has been assaulting Tiger defences encircling the town and both sides have claimed to have inflicted ever higher death tolls on the other.

Sources from Rajapaksa's office earlier said that troops had entered Kilinochchi from two locations.

State media said many rebels had fled the town.

The military developments powered the island nation's stock market higher. The Colombo All-Share index closed 5 per cent up. The market fell 40.8 per cent in 2008 on economic and war worries.

"With the news of Kilinochchi's fall, sentiment just got a boost," said Geeth Balasuriya, assistant research manager at HNB Stockbrokers.

The LTTE started fighting the government in 1983. It says it is battling for the rights of minority Tamils in the face of mistreatment by successive governments led by the Sinhalese majority since Sri Lanka won independence from Britain in 1948.

Exactly a year ago, Rajapaksa's government formally scrapped an increasingly tattered six-year truce brokered by Norway, saying the rebels were using it as cover to regroup and re-arm.