Civilians fleeing from Jaffna at a checkpoint in Omanthai in the northern Sri Lankan district of Vavuniya on Friday. (AFP)

Colombo, Aug. 19 (Reuters): The government-held city of Jaffna, cut off by fighting between Sri Lankan forces and Tamil Tiger rebels, faced dwindling supplies and soaring prices today but no real panic, aid workers and witnesses from the remote northern town say.

One city resident said that prices for staples were up more than three-fold, with petrol selling for more than four times the going price before the latest fighting began three weeks ago.

A cash shortage also hit the city, with people rushing to withdraw money from local banks in anticipation of a possible evacuation, he said.

Witnesses and aid workers said gunfire and artillery shelling could be heard throughout the night and into the morning, but authorities eased recent curfew restrictions. The Sri Lankan military said it had attacked Tiger naval units from the air along the Jaffna peninsula late yesterday.

“If this continues for another week, there won’t be any more food,” said Dilan, a pharmaceutical salesman who did not want to give his surname. “People are withdrawing money from the banks, so there is no money to be had,” he said by telephone. Communications with the region have been sporadic at best over the last week.

Police in Colombo set up checkpoints at all roads leading into the city as part of security for the South Asia Games, being held in the capital, a government spokesman said. Across the island, the UN High Commissioner for Refugees says more than 160,000 people have fled their homes — 41,000 of them in Jaffna.

The city has long been a key objective for the LTTE who are fighting the Sinhalese-majority state for a separate Tamil homeland. Initial reports said things were relatively quiet around the eastern port of Trincomalee, just north of where the latest fighting began around a rebel-held water supply.

In what could be a sign of growing self-confidence, government authorities relaxed the curfew in Jaffna, allowing residents to leave their homes between noon and 5 pm, witnesses said. Still, no fixed-wing aircraft were flying out of the enclave.