A Tamil Tiger ship carrying 12 rebels sank yesterday after a clash with the Sri Lankan navy, dealing a blow to efforts to put the island's stalled peace process back on track.

The military said the navy suspected the ship, belonging to the Liberation Tigers of Tamil Eelam (LTTE), was carrying weapons. After intercepting it, the navy fired warning shots.

"The suspected LTTE vessel then opened fire at Sri Lanka naval craft using medium calibre machine guns," the military said in a statement.

"Sri Lanka naval craft, exercising its right to self-defence, took immediate retaliatory action," the statement said. It added the navy saw a "huge fireball" and the vessel began to sink.

The incident is a new setback to the bid to end the two-decade war between the Tigers and the government, after the rebels suspended direct peace talks in April.

A statement on the pro-rebel Tamilnet website said the intercepted ship was a merchant vessel and was stopped by the navy in international waters.