SCENARIOS: Where does Sri Lanka's war go if rebel capital falls?

By C. Bryson Hull

COLOMBO (Reuters) - Sri Lankan soldiers on Friday were within 2 miles of Kilinochchi, the headquarters town of the Tamil Tiger separatist rebels they have fought since 1983 in one of Asia's longest-running wars.

Here are some possible scenarios for what happens if the army takes Kilinochchi, a symbolic target:

MORALE, MARKET BOOST: Taking Kilinochchi would by no means mean an end to the war, but it would be a major political boost to President Mahinda Rajapaksa's government and also to the armed forces' morale. Most financial analysts expect a very short-term rally on the Colombo Stock Exchange. But it has generally moved on its own fundamentals since the war has been running so long and players are used to it. The rupee currency is unlikely to be affected, since the Central Bank routinely intervenes to prevent any rapid movement.

TIGER Center SHIFTS EAST: If the army occupies the town, it will force the Tigers into hiding in the jungle -- to which they are very accustomed. It will also mean any Tiger administrative offices not destroyed in airstrikes will likely be forced to shift east to the rebel-held port of Mullaitivu. But soldiers are moving toward Mullaitivu from the south, and fighting there has been heavy in recent weeks.

ARMY MOVES DOWN FROM JAFFNA: If the army holds Kilinochchi, it will control all but about 40 km (25 miles) of the A9 road, the main north-south highway that goes through the narrow neck of the Jaffna Peninsula, the northernmost part of Sri Lanka. The army has been garrisoned there since 1995, but the Tigers are dug in across a short no-man's-land on the neck. It is heavily mined and Tiger artillery batteries there and southwest across the water at Pooneryn have inflicted heavy casualties on advancing troops. Should the army punch through the western port of Nachikuddah, where some of the bloodiest fighting of the last month has gone on, it would aim to hit Pooneryn and neutralize the artillery. Doing that would free troops in Jaffna to begin fighting their way down to squeeze the Tigers from two sides.

COUNTERATTACK: The Tigers could do what they have done after losing territory in the late 1980s and early 1990s, which is regroup in the jungles, then drive the army back while inflicting heavy casualties. But security analysts say there are several reasons that is less likely now. First, the army has grown to more than three times its size then, and gone from being a largely symbolic unit to a battle-hardened corps. Second, the military has improved its weaponry and adopted small-unit commando tactics that have proved an effective counter-insurgency strategy. Third, the rebels have been hit hard by the application of anti-terrorism financing laws around the world and interceptions of weapons shipments at sea by the Sri Lankan navy, with Indian assistance.

COLOMBO ATTACKS SPIKE: If the Tigers feel cornered in the conventional war, many analysts fear an increase in bomb blasts in the capital Colombo, more than 300 km to the southwest of the war zone. There have been six in the city since August 30, when a bomb exploded in a market and injured 45 people. It was the worst of the series, but earlier bombs have killed hundreds over the years. However, the city is under heavy security and the government has no compunction about carrying out heavy-handed sweeps of Tamil areas to avert future attacks.

(Editing by Jerry Norton)