Kicking off a display of military hardware along Colombo's sea front promenade ringed by stiff security, President Mahinda Rajapakse also brushed off threats of foreign aid cuts due to the worsening ethnic conflict and human rights situation.
Monday's celebrations went ahead despite threats from the Liberation Tigers of Tamil Eelam (LTTE), and following two weekend bomb attacks that killed 34 civilians and wounded nearly 200.
The president said the "challenge bestowed upon us by history is the defeat of terrorism," and asserted government forces had cornered the rebels in the northern part of the island.
"We faced this challenge squarely without avoiding it. Our security forces are today achieving victories against terrorism unprecedented in history," he said in an address to the nation from Colombo's Galle Face road.
"Terrorism is receiving an unprecedented defeat," said Rajapakse, whose government pulled out of a tattered Norwegian-brokered truce with the rebels last month.