President Mahinda Rajapakse had given until Saturday night for the Liberation Tigers of Tamil Eelam (LTTE) to allow the civilians to move to safety.
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"LTTE terrorists continued worsening suffering of the thousands of civilians entrapped in the outskirts of Mullaittivu, ignoring the 48-hour ultimatum served for the safe passage of civilians," the defence ministry said.
It did not say what action the military would take after the "ultimatum" to the Tigers, but military officials reported skirmishes and exchanges of gunfire in the territory still held by the retreating guerrillas.
The government has declared a 35 square kilometre (13 square mile) "safe zone" where civilians can take shelter.
The exact number of people trapped by the fighting is not known, with the government estimating the figure at 120,000 while the International Committee of the Red Cross says it could be about a quarter of a million.
"Terrorists are manning a forward defence line in the outer perimeters of