SP Thamilselvan, leader of the rebel's political wing, said: "We consider this a declaration of war and strongly condemn the attitude of the government.
"We may have to take a defensive position if the shelling continues. It is not decided yet."
He said there was still space for discussion while Norway's special peace envoy Jon Hanssen-Bauer was in Kilinochchi. Hanssen-Bauer is expected to leave on Monday.
Sri Lankan artillery pounded Tiger territory hours after the rebels offered to give in to a key government demand to open a sluice gate providing water to government territory.
The closure of the gate last month prompted the first ground fighting since the 2002 ceasefire.
The Tigers said they would re-open it but as the head of the unarmed Nordic-staffed ceasefire monitoring mission, retired Swedish major general Ulf Henricsson, headed towards the sluice south of the northeastern port of Trincomalee, army artillery opened fire.
Tommy Lekenmyr, chief of staff for the Sri Lanka Monitoring Mission said: "The government have the information that the LTTE has made this offer.
"It is quite obvious they are not interested in water. They are interested in something else. We will blame this on the government."
The government said the Tigers must leave the area of the sluice gate, which officially lies in army territory, but which military sources said was in an area effectively controlled by the rebels.
Palitha Kohona, head of the government peace secretariat, said: "The Tigers must vacate the area and let the irrigation engineers come in as they have done before."
"The Tigers have caused complete mayhem with their illegal actions."
Fighting has so far been restricted to a areas of the east near Trincomalee, where 21,000 displaced have been registered so far from Mutur alone. However, analysts fear it could spread.