The army and the government blamed the attack on the Liberation Tigers of Tamil Eelam (LTTE), but they denied involvement.
Brigadier Prasad Samarasinghe, a military spokesman, said on Tuesday: "We have found 12 bodies."
Samarasinghe said two of the victims escaped, one with unspecified injuries.
The reason for the attack late on Monday at a state-run irrigation project in Mahasenpura village near Batticaloa was not immediately clear.
The Tamil Tigers denied any part in the attack.
Seevaratnam Puleedevan, a LTTE official told The Associated Press by satellite phone from the rebel stronghold of Kilinochchi: "We have no involvement in these killings at all."
The report of the massacre came as the European Union banned the LTTE.
Plea for peace
Separately, the overseers of Sri Lanka's peace process urged the Tamil rebels and the Sri Lankan government on Tuesday to take steps to halt the rising violence.
The joint statement issued by the representatives of Japan, the US, Norway and the EU, who met in Japan on Tuesday, also called on Sri Lanka to recognise the rights of minority ethnic Tamils and called on the LTTE to renounce terrorism.
Attacks of security forces have
become an almost daily affair
Yasushi Akashi, Japan's peace envoy, said: "The responsibility for ending the conflict lies solely with [the rebels] and the government of Sri Lanka."
He said that there were limits to what other countries could do to help the peace process.
Also attending the meeting were Erik Solheim, Norway's development minister; Richard Boucher, US assistant secretary of state for South and Central Asia; and Herve Jouanjean, deputy director-general of the EU Commission for External Relations.
The meeting took place after EU governments agreed late on Monday to put the rebel group on their terrorist blacklist, a measure that will clear the way for the 25-nation bloc to freeze the group's assets within its territory.
The US and Canada already list the LTTE as a terrorist organisation.
On Saturday, the Tamil Tigers agreed to visit Norway next month to discuss the monitoring of a shaky cease-fire with the Sri Lankan government, but said they might withdraw from the truce if the EU decided to label them a terrorist organisation.