By Ranga Sirilal and Shihar Aneez
COLOMBO (Reuters) - Sri Lankan troops have captured the separatist Tamil Tiger rebels' headquarters town of Kilinochchi after months of fighting, Sri Lankan President Mahinda Rajapaksa said on Friday.
Troops fought their way into Kilinochchi in one of the biggest blows for the rebels in years.
"We should pay the gratitude of the whole nation to those heroic soldiers who achieved that victory," Rajapaksa said in a nationally televised address.
The Liberation Tigers of Tamil Eelam, who have been fighting for a separate homeland for minority Tamils in the east and north of the island for a quarter of a century, could not immediately be reached for comment.
Sri Lanka's military has been closing in on Kilinochchi since September. Over the past month, it has been assaulting Tiger defences encircling the town and both sides have claimed to have inflicted ever higher death tolls on the other.
Sources from Rajapaksa's office earlier told Reuters that troops had entered Kilinochchi from two locations and that fighting with rebels was going on.
"Troops are inside the town and they are mopping up things here and there," said a military source who asked not to be identified.
State media said the military had surrounded Kilinochchi and that many rebels had fled.
Defence analysts said the fall of Kilinochchi would be a bitter blow for the LTTE.
"This is a major defeat for the LTTE. The fall of Kilinochchi means the LTTE will have their only territory in Mullaitivu," said Iqbal Athas, a defence analyst with Jane's Defence, referring to a rebel stronghold in the northeast.
"I would not say this is the end of the war, but it may be the beginning of the shrinking of major LTTE dominated areas."
Pakiasothy Saravanamuttu, a political analyst, said Kilinochchi was significant for the LTTE's political and administrative activities.
"The capture indicates very clearly that the LTTE's attempt to build up a quasi-state has now collapsed," he said.
Exactly a year ago, Rajapaksa's government formally scrapped an increasingly tattered six-year truce brokered by Norway, saying the rebels were using it as cover to regroup and re-arm.
The military developments powered the island nation's stock market (.CSE) higher. At 7:50 a.m. British time, the Colombo All-Share index was up 4.9 percent. The market fell 40.8 percent last year on economic and war worries.
"With the news of Kilinochchi's fall, sentiment just got a boost," said Geeth Balasuriya, assistant research manager at HNB Stockbrokers.
Currency dealers said speculation of an imminent military victory arrested the rapid slide of the Sri Lankan rupee.
The rupee, which hit an all-time low on Monday had been expected to hit 115.00 per dollar on Friday, dealers said. But at 7:18 a.m. British time was trading around 113.50/70 level, Reuters data showed.
The LTTE started fighting the government in 1983. It says it is battling for the rights of minority Tamils in the face of mistreatment by successive governments led by the Sinhalese majority since Sri Lanka won independence from Britain in 1948.
(Editing by Sanjeev Miglani)