A spokesperson for the Scandinavian peace monitors said the 12 Tiger rebels on the ship jumped into the sea and it was not known whether they were rescued.
deal looks shaky
Sri Lankan defence officials said however the merchant ship blew up and sank on its own as the navy fired a warning to halt the vessel. The ship was operated by the rebel Liberation Tigers of Tamil Eelam (LTTE), also called Tamil Tigers.
Tamil Tigers' sources said it was clear that the navy had attacked the ship in international waters.
Meanwhile, a top Tamil politician was assassinated by an unidentified gunman in the northern town of Jaffna on Saturday, military officials said.
The victim wads a member of the Varatharajah faction of the Eelam People’s Revolutionary Liberation Front, a bitter rival of the Tamil Tigers.
The politician, Subathran, was assassinated at his office in Jaffna. He is the most senior rebel politician to have been killed in recent months.
The killing of Subathran is not expected to affect the peace deal between the LTTE and the government. But the sinking of the Tigers' ship could further damage the fragile cease-fire that has lasted since February last year. Peace talks have been on hold since April.
A Scandinavian team is monitoring the cease-fire deal.
The incident clouds the peace process aimed at putting an end to twenty years of fighting between the LTTE and the government.
The LTTE has been fighting for an independent Tamil country, “Eelam”, in north and east Sri Lanka.
The Tigers, a few weeks back, boycotted a donor conference in Tokyo, which raised $4.5 billion to rebuild the war-torn island.
The rebels are demanding an interim administration for the Tamil-majority north and east. They have rejected the government's modified version of their proposal.