* Sri Lanka rebels vow to fight despite losing land

* Tigers say will target Sri Lanka economy

* Tigers say surrender is no option

By Shihar Aneez and Ranga Sirilal

COLOMBO, Dec 23 (Reuters) - Sri Lanka's separatist Tamil Tigers on Tuesday vowed to fight on even if they lose more territory inside the area they want to establish as a separate nation for Sri Lanka's Tamil minority.

In an e-mail interview from an undisclosed location in northern Sri Lanka, Balasingham Nadesan, political head of Liberation Tigers of Tamil Ealam (LTTE), said the group's "freedom struggle does not centre on a town or a city."

The Tigers will also target Sri Lanka's economy as part of their guerrilla strategy to counter a military offensive that has made the most progress of any in the 25-year-old war, and is now on the edge of the rebels' self-proclaimed capital, Kilinochchi.

"Losing land and recapturing it is common. It is not the real estate that matters. Our freedom struggle will continue to create war towns until our struggle reaches its goal -- until we win," he said.

He rejected President Mahinda Rajapaksa's precondition that the rebels surrender their arms before coming for peace talks, which the Tigers have offered.

"A peace talk at this juncture would not be possible as government has asked the LTTE to lay down their arms and surrender," he said.

Nadesan admitted the Tigers had faced some recent setbacks in the war, but said their options for fighting back included sabotage against Sri Lanka's $32 billion economy.

"The destruction of the economy is also an aspect of our defensive war. When the economy of the government is destroyed, its genocidal war against the people will also be weakened," Nadesan said, without elaborating on what the LTTE may do.

An LTTE attack on the main international airport in 2001 dealt a heavy blow to the economy by hurting tourism revenues, a factor in a year that saw negative 1.4 percent growth.

ECONOMY MISMANAGED

Political critics say President Mahinda Rajapaksa's administration has mismanaged the economy, which now is facing a host of problems, including high loan costs, a potential balance-of-payments deficit and low foreign currency reserves.

Allies of the president acknowledge the economic challenges, but do not expect it to extract too much political cost given widespread support for the war amid multiple military victories.

"We will teach a good lesson to the forces in this Kilinochchi battle," Nadesan said. "We are waiting for the time, place and setting to launch a offensive."

The LTTE has lost around 2,250 fighters so far in 2008, he said. The military puts the number at around 8,000. Both sides in the past have repeatedly distorted battelfield statistics to their advantage.

"Our military capabilities are intact and we have no difficulties in acquiring weapons," he said. "We have confidence and we will regain the swathes of land." Since 1983, the Tigers have fought in what they say is a struggle to create an independent state for Tamils, who have complained of mistreatment by succesive governments led by the Sinhalese majority since independence from Britain in 1948.

But in the course of one of Asia's longest-running insurgencies, the LTTE has landed on U.S., E.U. and Indian terrorism lists after scores of suicide bombings and assassinations targeting politicians and Tamil rivals.

On Monday, President Rajapaksa threatened to formally ban the LTTE as a terrorist group but political analysts have said any such move would be largely symbolic and have little real impact on the rebel group.

The LTTE has stepped up its guerrilla war in the Eastern Province, from which it was driven by army troops and breakaway rebels in 2007, he said. (Writing by Bryson Hull; Editing by Valerie Lee)

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