Rasiah Ilanthiraiyan, a Tiger military spokesman, said: "He was targeted by the DPU [the government's Deep Penetration Unit].
"He always spoke for the rights of the people of North East."
Karunaratnam, who was in a vehicle, was returning from a Sunday service.
Udaya Nanayakkara, a military spokesman, denied that the government undertook the attack: "We can't take responsibility for what's happening in areas not in our control."
Karunaratnam had campaigned for the rights of Tamils, an ethnic minority in the island nation.
He had accused the government of serious human rights violations in its military campaign against the LTTE.
The government denies carrying out bomb attacks in Tiger-held territory, while the LTTE has said that its members, a politician, and civilians have been killed in such strikes.
The government has stated that it aims to rout the Tigers by the end of the year.
The military said its ground troops killed 14 Tamil Tiger fighters in frontline fighting on Saturday.
While on Sunday, in the east of the country, two public servants were shot dead by unidentified gunmen, officials said.
The LTTE has been fighting for an independent state for minority Tamils since 1983. Tens of thousands of people have died during the conflict.