Sri Lanka hands 37 Chinese fishermen to embassy

COLOMBO (Reuters) - Sri Lanka handed over 37 Chinese fishermen to their embassy on Tuesday, officials said, two days after the Sri Lankan navy arrested them for fishing without permission in the island nation's offshore waters.

The fishermen were arrested aboard two trawlers off the east coast town of Batticaloa on Sunday, along with two Sri Lankan agents.

China has been competing for influence in Sri Lanka with India, the island's most important ally, and has been Sri Lanka's biggest source of loans in the past two years, so holding the fishermen longer could have put strain on their increasingly close ties.

"The fault is not with the (Chinese) crew. The case is against the (Sri Lankan) owner now," Navy spokesman Kosala Warnakulasuriya told Reuters. "We have handed over the Chinese crew to officials from the Chinese embassy," he said.

Sri Lanka's police spokesman, Ajith Rohana, said the two Sri Lankan agents were given bail after appearing in court.

The trawlers have a license to fish outside Sri Lankan waters but were seized while fishing inside the 300 nautical mile zone. The agents' role was not immediately clear.

The Chinese embassy had "urged Sri Lankan authorities to handle the issue in accordance with the law, sort out the truth and release the Chinese fishermen as soon as possible", the state news agency Xinhua reported on Monday.

Sri Lanka's location astride an ancient Indian Ocean trade route makes it of strategic commercial and military interest to the United States, India and China.

Beijing has lent Sri Lanka hundreds of millions of dollars to build ports, roads, railways, power plants and a new airport, but Colombo has denied speculation that China wants military bases on the island.

(Writing by Shihar Aneez, editing by Tim Pearce)