The Tamil Tigers have accused the Sri Lankan government of killing 1,000 civilians during a raid on rebel territory as a 24-hour ultimatum to the rebels to surrender passed at midday local time (0630 BST).
The government denied the accusations, saying the military had rescued thousands of civilians from the "no-fire" war zone in the north after breaking through a barrier the Tigers had built.
More than 40,000 civilians have fled the ever-shrinking rebel area since Monday's offensive.
Human rights agencies have warned of an imminent bloodbath, with the Liberation Tigers of Tamil Eelam (LTTE) refusing to surrender.
Seevaratnam Puleedevan, secretary general of the Tamil Tiger peace secretariat, urged the international community to intervene to force a permanent ceasefire, a move Sri Lanka has ruled out.
"LTTE will never surrender and we will fight and we have the confidence that we will win, with the help of the Tamil people," Puleedevan told Reuters by telephone.
He said he was near the border of the no-fire zone, and confirmed that the LTTE leader, Vellupillai Prabhakaran, was inside it.
"He is with us and he is directing the war against the Sri Lankan armed forces and providing a lot of support and assistance to the people," Puleedevan said.
With perhaps as many as 100,000 civilians remaining in the 6.5-square-mile strip of swampy coastline, both sides exchanged allegations of brutality.
The Tigers' political head, B Nadesan, told the Tamilnet website that the Sri Lankan army had killed hundreds of people with internationally banned weapons such as cluster shells, napalm bombs and phosphorus bombs.
A rebel spokesman, who gave his name to the BBC as Thileepan, said a hospital, an orphanage and many houses had been hit and huge numbers of civilians had been killed in a military onslaught on the area.
The military says the rebels had forced the civilians to stay and were killing anyone who tried to escape. A Sri Lankan army spokesman said 17 people died and 200 were injured when suicide bombers among the fleeing crowds detonated devices. It was not possible to verify the claim and Nadesan denied it.
"The LTTE denies these fabricated stories that seek to discredit us and divert attention away from the suffering of the Tamil people," he said.
Video footage released by the Sri Lankan defence ministry yesterday showed civilians pouring through the breach in the earth barrier.
The civilians waded through a lagoon towards the army's lines, some carrying possessions in bags on their heads. One fugitive said that the rebels had warned people not to go, saying they would not be safe in government-controlled areas. The military regards the offensive of the past 24 hours as a breakthrough in its stand-off with the last remnants of the Tigers.
A senior UN official told the Guardian that the UN had been briefed by the Sri Lankan government to expect thousands more people to come out of the area in coming days.
But the UN children's fund, Unicef, warned that the civilians still trapped faced grave danger.
"If fighting continues and if the LTTE refuses to allow people to leave the conflict zone, we face the intolerable inevitability of seeing many more children killed," said Unicef's regional director for south Asia, Daniel Toole.
"With this latest surge in fighting, our greatest fear is that the worst is yet to come."
It is also not clear how many civilians are left inside the zone. The Sri Lankan government has maintained that only about 40,000 remained before the mass escape, while the UN estimated the figure at about 100,000.
The Sri Lankan government has repeatedly claimed that the rebels are using the civilians as human shields, a claim supported by the UN and many other independent observers. There have been a number of credible reports of civilians being killed by the LTTE as they tried to escape from the no-fire zone.
But the government has also faced intense criticism over the way it has gone after the rebels, with the UN estimating that at least 4,500 civilians have been killed in the past three months.
Doctors have described scenes of carnage as shells and bullets fired from government positions slammed into the tightly packed civilians. Many tried to protect themselves by digging bunkers in the sand, but dozens are still reported to have been killed or injured every day.
There are estimated still to be at least 300, and possibly as many as 500, well-armed LTTE cadres in the no-fire zone. Witnesses have told the Guardian they have seen the fighters manning earth embankments they have built across key access points and firing on government positions.
Setting the noon deadline yesterday, the Sri Lankan president, Mahinda Rajapaksa, said Prabhakaran, the LTTE leader, should surrender or face military action.
"The only thing Prabhakaran can now do is to surrender. I don't want him to take cyanide and commit suicide. He has to face charges for his actions," he said.
What now concerns the UN is how the military will seek to end the conflict. UN officials say that the government has been concerned about mounting pressure from some members of the UN security council over the civilian death toll, and had been making it clear during the last few days that a major push was being prepared.
The Sri Lankan government has defended its decision to place those who have escaped the fighting behind barbed wire inside camps in a high-security area around Vavuniya, south of the no-fire zone.
Its officials say that until they can be sure they have weeded out all LTTE members among the civilians in the camps, everyone will have to be detained.
A small number of elderly people have been released, but the camps are still home to thousands of children, pregnant women and elderly people.
The UN has expressed concern about conditions in the camps, many of which are struggling to cope with the daily influx of new arrivals. Poor sanitation and shortages of water have raised concerns about the spread of disease, and the government and aid agencies face a major challenge in getting enough food into the camps, with many of those arriving – particularly children – showing signs of malnourishment.