The warning came as the head of the ceasefire monitoring mission, Ulf Henricsson, said Sri Lanka was in a state of "low intensity war".

Although the Tigers say they were defending their waters Thursday's attack has drawn wide condemnation.

The US has expressed "deep concern" over the violence, and urged restraint.

International monitors say the rebels have no maritime territorial rights.

"You could in some definition say we already have a war," said Mr Henricsson, head of the international monitoring mission.

"We don't have a peace agreement, we have a ceasefire agreement. So there is a war ongoing. It is a low intensity war. You can say that."

The BBC's Dumeetha Luthra, in Colombo, says there are almost daily violations of the ceasefire, and the situation is looking very bleak.

Accusations

In a statement, the EU warned that it might impose restrictions on senior Tamil Tiger members in reaction to Thursday's sea battle near the northern town of Jaffna.

"The reckless behaviour of the LTTE [Tigers] in the last days can only contribute to a dangerous escalation that results in growing hostilities and jeopardises any possibility for future peace talks," the statement said.

However, the EU also warned the Sri Lankan government not to inflame the situation by retaliating with extreme force.

The government launched air strikes against Tamil-controlled areas in the east of Sri Lanka following a recent attack.

The Tigers have condemned the ceasefire monitors for saying the rebels have no rights at sea, and suggested they could become targets in future clashes.

The rebels and monitors held emergency talks in the wake of the battle, which the government says left dozens dead.

After the incident the monitors blamed the Tigers for provoking the navy, saying it was "very clear that the Sea Tigers have no rights at sea".

"Nobody has the right to pass judgment on the sovereign rights of our access to the adjacent sea and air space of our homeland," a Tamil website quoted him as saying.

In an earlier letter to the monitors, he also urged them "for the last time" not to board navy vessels. A monitor was on one of the navy ships involved in the incident.

Sri Lanka has been rocked by conflict since the Tigers launched their campaign for a separate state in 1983. Some 60,000 people have died.

A ceasefire agreement was signed four years ago, but violence has soared in the past month.