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.