Residents in the army-held Jaffna peninsula said shelling started before dawn on Monday, in a continuation of months of fighting that has killed hundreds of civilians, troops and Tamil separatist fighters.
Peace talks held in Geneva, Switzerland, ended on Sunday with both sides meeting separately with mediator Norway before failing even to agree on whether or not to meet again for talks in the future.
That was a worst-case scenario for many analysts, diplomats and residents, who now fear a resumption of late July's heavy fighting that left hundreds dead, the worst violence since a 2002 ceasefire.
The Colombo stock market, which gained ahead of the talks, fell 1.2 per cent on Monday.
Erik Solheim, the Norwegian chief mediator, who oversaw the talks, said the government and Liberation Tigers of Tamil Eelam (LTTE) had said they were committed to a truce which still technically holds on paper, and had promised not to launch military offensives.
Both sides spent Sunday accusing each other of abuses and of deadlocking the talks, which analysts say were a sideshow, and sporadic fighting continued.
SP Thamilselvan, head of the Tiger's political and chief negotiator, said overnight that the rebels would not participate in new talks until the A9 road linking the north to the rest of the country was reopened, something the government refuses to do.
The government argues it is unsafe to reopen the road because of rebel artillery fire, but analysts say the closure is helping to give the military a strategic advantage by curbing movement of rebel fighters and munitions.
Talks in Geneva failed to narrow
the gap between the two parties
The road - nicknamed the Highway of Death because of past battles fought over it - was closed in August because of fighting, stranding thousands of people, many of whom are still waiting to be evacuated from the peninsula by ship.
The government is shipping emergency supplies to Jaffna, but residents issued with ration cards say there is not enough to go around.
The island's two-decade civil war has already killed more than 65,000 people since 1983, with hundreds killed and tens of thousands displaced since fighting flared in July.