COLOMBO, July 14 (Reuters) - Sri Lankan fighter jets bombed Tamil Tiger areas in the island's northwest as troops battled with insurgents on Saturday, with both sides claiming to have inflicted heavy casualties on the other.

The military said 10 soldiers were killed and 34 wounded after troops confronted Tamil Tigers in response to incoming artillery and mortar fire, and jets bombed a rebel camp in the northwestern district of Mannar.

The Tigers said around 600 army troops had infiltrated their defence lines in a two-pronged offensive and that the two sides clashed in a lengthy confrontation.

They said they had killed at least 16 soldiers, and that three of their own fighters were killed. Bombs dropped by the jets had fallen near the battlefield, they added. However there was no independent confirmation of what had happened or how many people were killed.

Sri Lanka has been gripped by renewed civil war since the collapse last year of a ceasefire agreed in 2002. An estimated 4,500 people have been killed since then, taking the death toll from 24 years of civil war to nearly 70,000.

The latest fighting came three days after the government declared it had driven the Liberation Tigers of Tamil Eelam (LTTE) from their last jungle stronghold in the east after months of fighting, and two days after the rebels vowed to cripple the island's economy with attacks on major military and economic targets.

"We bombed the LTTE camp in Mannar and it was very successful, a lot of casualties," Air Force spokesman Group Captain Ajantha De Silva said.

The military said 10 soldiers were killed and 34 were wounded during the fighting inside Tiger territory.

"Sri Lankan troops infiltrated into our area. There was a heavy exchange of shelling, and then an hours-long pitched battle," Tiger military spokesman Rasiah Ilanthiraiyan told Reuters in the northern rebel stronghold of Kilinochchi.

"Their advance was totally thwarted," he added.

"The Sri Lankan government troops fell back to their original positions with heavy casualties ... We have four bodies in good enough condition to hand over to the Red Cross. A few more bodies in bad shape had to be cremated on the spot."

Both sides also continue to exchange heavy fire daily in the northern Jaffna peninsula.

The rebels, fighting for an independent homeland in the north and east of the island, said this week their aim was to cripple Sri Lanka's $23 billion economy.

Tiger political wing leader S.P. Thamilselvan told Reuters in an interview that peace was "not possible" as long as Mahinda Rajapaksa remained president, pouring cold water on international efforts to halt the two-decade conflict.

The military has captured vast swathes of territory from the Tigers in the east in recent months and fighting is now focused on the north, but analysts see no winner on the horizon. (Additional reporting by Simon Gardner in Kilinochchi)

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