The attack near the town of Habarana, about 190 km (120 miles) northeast of the capital Colombo, on Monday morning was one of the most devastating suicide bombings to hit the Indian Ocean island.
It came at the start of a week of international diplomacy aimed at ending a rash of fighting between the military and the rebels ahead of planned peace talks in Geneva on October 28-29.
Brigadier Prasad Samarasinghe, a Sri Lankan military spokesman, said Tamil Tiger separatist fighters had rammed a small truck loaded with explosives into an military convoy of over a dozen buses.
"They have so far recovered 67 bodies and there may be more," he said.
"All these people were without weapons and were going on leave."
Many of those killed were sailors travelling to or from their bases.
Another 60 people, including some civilians, were injured in the blast, he said.
The convoy had stopped near the town and many sailors had stepped out of their buses when the truck rammed into the vehicles, officers said.
"It is very clear that the LTTE is not willing to distance itself from terrorism"
Keheliya Rambukwella the government's defence spokesman
"There were about 15 buses and 13 were damaged in the explosion," a navy officer in Colombo, who did not want to be identified, told Reuters.
There were some small shops in the area and civilians were also caught in the blast, government officials said.
Government officials said that the soldiers were unarmed and in civilian clothes as they were travelling as they were ending or starting a period of leave.
Unarmed soldiers targeted
A senior government minister condemned the incident, calling it a "barbaric terrorist attack on unarmed soldiers".
"It is very clear that the LTTE is not willing to distance itself from terrorism," Keheliya Rambukwella, the government's defence spokesman and a minister, said.
Both sides have accused the other of targeting civilians
Monday's attack came as Yasushi Akashi, the peace envoy of the island's chief financial donor, Japan, began talks with government leaders to push a four-year peace process that has been battered by mounting violence.
Hundreds of people have been killed in spiralling violence in Sri Lanka since late July, and a truce brokered in 2002 now exists only on paper.
Last week, dozens of troops and rebels were killed and hundreds wounded in one of the deadliest battles since the truce.
On Sunday, the Sri Lankan navy shot and sunk a suspected rebel trawler off the country's northwestern coast, killing six suspected Tamil Tigers.
More than 65,000 people have been killed since 1983 when the Tamil Tigers began fighting for an independent Tamil homeland.