COLOMBO (Reuters) - Sri Lankan troops killed the head of the Tamil Tigers' vast international financing network and 16 other fighters, and captured a hospital in the last town the separatist guerrillas hold, the military said on Thursday.

Sri Lanka's military has encircled the Liberation Tigers of Tamil Eelam (LTTE) in a mere 37 sq km (15 sq miles) of the island nation's northeastern coast and is fighting to deal a death blow to a civil war that has raged off and on since 1983.

Army commanders say nearly all of the Tamil Tigers' top guerrillas including leader Vellupillai Prabhakaran are in that area, with some personally commanding the battles.

Mortar fire killed the chief of the LTTE's financial wing yesterday, military spokesman Brigadier Udaya Nanayakkara said.

Sabarathnam Selvathurai, whose nom de guerre was Thamilendri, administered LTTE finances, which analysts say grew to hundreds of millions of dollars a year through smuggling, credit card fraud, extortion and Tamil diaspora donations.

Intelligence reports show he was killed in Puthukudiyiruppu, the final town held by the Tigers, the military said. Other fighting in the area killed 16 Tigers, Nanayakkara said.

Troops are inside the town and have just a few kilometers to go before they reach a lagoon on its eastern edge, across from which is a 12-km coastal strip set up as a no-fire zone. Tens of thousands of civilians are inside the area.

On Thursday morning, soldiers captured the Puthukudiyiruppu hospital, a large medical complex which the Tigers had accused the military of shelling on purpose in January.

The military denied it and at the time published aerial photos showing it intact. Nanayakkara said it remained undamaged on Thursday.

The Tigers could not be reached for comment but the pro-LTTE web site again accused the military of shelling and killing civilians. It said 133 had been killed inside the no-fire zone on Tuesday.


The military says it is has stopped firing artillery and is not returning fire at LTTE gun positions located inside the safe zone. It says the Tigers are again trying their old ploy of creating a civilian crisis to get a ceasefire so they can re-arm.

The government says 70,000 people are inside the no-fire zone, while the Red Cross says there are 150,000.

Aid agencies, rights groups and the government have urged the LTTE to stop holding civilians by force as human shields. The Tigers insist they are staying by choice.

According to the military, about 38,900 people have fled Tiger-held areas this year.

Although few doubt the military shortly will destroy the Tigers as a conventional force, few also expect the group to stop carrying out unconventional attacks like a suicide bombing that killed 14 in southern Sri Lanka on Tuesday.

(Writing by Bryson Hull; Editing by Sanjeev Miglani)