The blast came after the navy claimed that they had killed four LTTE fighters in a boat, about 20km off the Jaffna peninsula, in the northern sea.
Supplies headed for rebel personnel were onboard the 16-metre vessel which exploded and sank, D K P Dassanayke, a navy spokesman said.
The navy suffered no casualties in the attack, Dassanayke said.
The attack came amid intensified attempts by the military to destroy the LTTE's de facto state in the north of the country in recent months.
The government pulled out of a 2002 Norweigan-broakered ceasefire with the LTTE in January.
The LTTE has been fighting since 1972 for a separate homeland for ethnic minority Tamils in Sri Lanka.