The breakaway faction will be headed by Karuna, the rebel leader in the east, a senior official from Karuna's office said on condition of anonymity.
The split was prompted by arguments between Karuna and Tamil Tiger leader Vellupillai Prabhakaran over the deployment of new recruits from the east to the north.
The official said the split would not lead to fighting between the rebel factions. He said Karuna was also committed to a fragile two-year-old ceasefire with the government.
The division is a serious blow to the rebels, who until now have been largely united in their 19-year war for a separate homeland.
It also comes a month before Sri Lanka holds nationwide parliamentary elections.