(Adds media centre quote, forex dealer comments, truce details)
By Ranga Sirilal and Shihar Aneez
COLOMBO, Jan 2 (Reuters) - Sri Lankan troops fought their way into the Tamil Tigers' de facto capital of Kilinochchi and the entire town will soon be under government control, an official said on Friday, in what would be a major blow for the rebels.
The Sri Lankan military has had a series of recent battlefield victories against the Tigers and vowed to end their more than 25-year separatist war.
"(The) fall of Kilinochchi soon will be a reality," said defence ministry spokesman and government minister Keheliya Rambukwella.
Sources from President Mahinda Rajapaksa's office told Reuters that troops had entered Kilinochchi from two locations and that fighting with rebels was going on. Military sources said an announcement was expected soon from Rajapaksa.
"Troops are inside the town and they are mopping up things here and there," said a military source who asked not to be identified.
State media said the military had surrounded Kilinochchi and that many rebels had fled.
In a special media briefing Lakshman Hulugalla, director general of the Media Centre for National Security, said "Kilinochchi will be captured within few hours time".
Sri Lankan stocks rose around 5 percent on the news and the rupee steadied.
The Liberation Tigers of Tamil Eelam (LTTE) had no immediate comment.
Defence analysts said the fall of Kilinochchi would be a bitter blow for the LTTE.
"This is a major defeat for the LTTE. The fall of Kilinochchi means the LTTE will have their only territory in Mullaitivu," said Iqbal Athas, a defence analyst with Jane's Defence, referring to a rebel stronghold in the northeast.
"I would not say this is the end of the war, but it may be the beginning of the shrinking of major LTTE dominated areas."
Pakiasothy Saravanamuttu, a political analyst, said Kilinochchi was significant for the LTTE's political and administrative activities.
"The capture indicates very clearly that the LTTE's attempt to build up a quasi-state has now collapsed," he said.
Exactly a year ago, Rajapaksa's government formally scrapped an increasingly tattered six-year truce brokered by Norway, saying the rebels were using it as cover to regroup and re-arm.
The military developments powered the island nation's stock market (.CSE) higher. At 0750 GMT, the Colombo All-Share index .CSE was up 4.9 percent. The market fell 40.8 percent last year on economic and war worries.
"With the news of Kilinochchi's fall, sentiment just got a boost," said Geeth Balasuriya, assistant research manager at HNB Stockbrokers.
Currency dealers said speculation of an imminent military victory arrested the rapid slide of the Sri Lankan rupee LKR=.
The rupee, which hit an all-time low on Monday had been expected to hit 115.00 per dollar on Friday, dealers said. But at 0718 GMT was trading around 113.50/70 level, Reuters data showed.
The LTTE started fighting the government in 1983. It says it is battling for the rights of minority Tamils in the face of mistreatment by successive governments led by the Sinhalese majority since Sri Lanka won independence from Britain in 1948.
Government troops on Thursday captured Iranamadu junction, south of the LTTE's self-proclaimed capital and Paranthan town to the north.
The military said the capture of the two key rebel-held areas had paved the way for military to move into Kilinochchi for the first time in more than a decade.
Sri Lanka's military has been closing in on Kilinochchi since September. Over the past month, it has been assaulting Tiger defences encircling the town and both sides have claimed to have inflicted ever higher death tolls on the other.
It is nearly impossible to verify battlefield claims since both the government and the LTTE block independent media access to the war zone, and have repeatedly distorted figures to their advantage. (Editing by Alex Richardson) (For a related TIMELINE on key events during the civil war click on [nSP257627])