S.Lanka war seen escalating as truce declared dead

By Ranga Sirilal

COLOMBO (Reuters) - Sri Lanka's 25-year civil war with Tamil Tiger rebels will likely escalate into the bloodiest period of fighting the island has seen after the government scrapped a tattered truce, experts said on Thursday.

Sri Lanka plunged back into war after four years of relative peace almost as soon as President Mahinda Rajapaksa took power in late 2005. But both he and the Tigers had held off scrapping a Norwegian-brokered truce to avoid appearing the villain.

With the pact now formally ended, hopes of resurrecting collapsed peace talks any time soon are dead and investment in the $26 billion economy could suffer.

Sri Lanka's stock market fell 1.2 percent on Thursday as investors braced for escalation.

"This means all-out war. The government has dropped the peace option and has opted for a fuller military onslaught on the rebels," said Iqbal Athas, an analyst with Jane's Defence Weekly in Colombo.

Wednesday's announcement came hours after suspected Tiger rebels bombed a military bus in central Colombo, killing four people and wounding 24. It was the latest in a litany of attacks that have killed hundreds in recent months.

Violence continued on Thursday. The military said it destroyed six rebel bunkers in the northwestern district of Mannar, killing six Tigers, while the pro-rebel Web site, www.tamilnet.com, said the insurgents had thwarted a major army offensive and killed 10 soldiers in apparently the same incident.

Separately, two soldiers were killed in a mine blast in the northern district of Polonnaruwa.