Government forces established control over the village of Ampalavanpokkanai in the district of Mullaittivu on Thursday afternoon following heavy fighting, the defence ministry said.
The bodies of seven guerrillas were recovered, but a search operation was still underway.
The ministry did not say if troops suffered any casualties.
In the same area, soldiers found diving equipment and underwater "scooters" used by suicide bombers, the ministry said.
Government forces are keeping up a major offensive against the Liberation Tigers of Tamil Eelam (LTTE) guerrillas who have been hemmed into a narrow strip of coastal jungle area in Mullaittivu.
The fighting has stoked concern about tens of thousands of civilians trapped in the conflict zone.
The LTTE in a statement Friday accused the military of killing 34 civilians in shelling on Thursday. Sri Lanka's military has denied targeting civilians.
Independent verification of claims is impossible as authorities have restricted