(Updates with Balasingham comment, details)

By Simon Gardner

COLOMBO, Nov 23 (Reuters) - Sri Lanka's military battled Tamil Tiger rebels with tanks and fighter jets along a shared "border" in the island's east on Thursday, with each side blaming the other for the outbreak of fighting.

The Liberation Tigers of Tamil Eelam (LTTE) said the army entered no-man's land in the eastern district of Batticaloa with tanks and armoured vehicles, while the military said the Tigers were first to fire heavy artillery.

The army said seven soldiers were injured, but there were no details of any rebel casualties.

In a separate incident in the eastern district of Ampara further south, three policemen were killed in a firefight with Tigers who had ambushed them in paddy fields in government territory, officials said.

"There is an intense confrontation going on," Liberation Tigers of Tamil Eelam (LTTE) military spokesman Rasiah Ilanthiraiyan told Reuters by telephone from the town of Kilinochchi, the rebels' northern stronghold.

"They are moving with tanks and armoured personnel carriers towards our forward defence line," he added, referring to the fighting in Batticaloa.

"They are trying to come into our territory. They have breached the no-man's zone and are still in it."

Ilanthiraiyan said the battle was raging on the defence lines that separates rebel from government territory in the east, near the rebel-held town of Vakarai, where an estimated 30,000 displaced persons have fled to camps.

The military denied it had entered no-man's land, and said that air force fighter jets had launched a third consecutive day of air strikes on rebel positions.

"They initiated a heavy attack using artillery and mortars. We have retaliated with ... armoured tanks and also air support," said a military spokesman.

CIVILIANS CAUGHT IN MIDDLE

More than 3,000 civilians, troops and rebel fighters have been killed in military clashes, naval battles, ambushes and aerial bombings this year, leaving a 2002 ceasefire that still holds on paper in tatters.

Many analysts and ordinary Sri Lankans fear a conflict that has killed more than 67,000 people since 1983 could escalate and spread across the island.

And with President Mahinda Rajapakse rejecting outright rebel demands for a separate homeland for minority Tamils in the north and east, some expect the conflict could rumble on for years.

"I see a continuation of a medium-intensity conflict punctuated by high intensity episodes," said Jehan Perera of non-partisan advocacy group the National Peace Council. "At the present time, we are a change of leadership away, on either side, from (a lasting peace deal)."

Perera said the absence of chief rebel negotiator Anton Balasingham, who is battling bile duct cancer in London, from the island's failing peace process was a major disadvantage.

"Balasingham's absence will deprive the Tigers of a person who had a more comprehensive view of the entire ethnic conflict... and was willing to take risks on the possibility that a negotiated settlement will yield something better," he said.

"We are unlikely to see ... any too-good-to-be-true breakthroughs without him."

Balasingham is a top adviser and speech writer to reclusive rebel leader Velupillai Prabhakaran -- who is due to make an annual address on Monday which analysts and financial markets will scour for signs of the Tigers' future military strategy.

"I am deeply sad that I am crippled by this illness, unable to contribute anything substantial towards the alleviation of the immense suffering and oppression of my people," Balasingham, who became a British national thanks to a stint working at the British High Commission in Colombo and spearheaded successive peace talks since 1985, told pro-rebel Web site www.tamilnet.com. (Additional reporting by Ranga Sirilal in COLOMBO)

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