"Gallant soldiers of Army 58 Division and Commando Brigade have liberated the strategically important Vidattaltivu town this morning," the defence ministry said in a statement on its website.
It also said that it was the first time Sri Lankan troops had held the town since the departure of an Indian peacekeeping force in 1990.
Brigadier Udaya Nanayakkara, a military spokesman, said that while soldiers had entered the town, fighting still continued on Wednesday afternoon.
The LTTE is fighting for an independent state in north and east of Sri Lanka for ethnic Tamils, a minority in the predominantly Sinhalese country.
At least 70,000 people have died since the civil war began in 1983.
Military analysts said the capture of the base in Mannar district would mark an important conquest for the government.
General Jerry de Silva, a former army commander, said: "It's a very significant victory. It's the main Sea Tiger base on the northwestern coast."
But he also raised the possibility that the fighters had allowed the military to take over the base for tactical reasons.
Other analysts said the Tigers have additional bases where they can offload their array of smuggled weapons and goods.