Sri Lankan authorities said on Friday said they were interrogating the new head of the Tamil Tigers, their most-wanted target since crushing the separatist rebels and their 25-year insurrection in May.

But mystery remained over where Selvarajah Pathmanathan, the man who ran the Liberation Tigers of Tamil Eelam's (LTTE) lucrative arms and smuggling operations for decades, was arrested.

Pathmanathan is the public face of the LTTE's post-war remnants and the highest-ranking Tiger still alive, after troops killed LTTE founder Vellupillai Prabhakaran in the war's cataclysmic final battle on the northeastern coast on May 18.

"He is in custody in Colombo and is being questioned," said military spokesman Brigadier Udaya Nanayakkara, who declined to say where he had been arrested.

The fact that Pathmanathan was in Sri Lankan custody helped push the Colombo Stock Exchange to its highest level in more than 14 months, gaining 0.7 per cent in the first 90 minutes of trade.

Late on Thursdsay, Nanayakkara had said Pathmanathan -- wanted on two Interpol warrants and better known by his nickname KP -- was picked up in Thailand.

But Thailand's prime minister said he had information Pathmanathan had been arrested, but not in Thailand.

The LTTE, in an emailed statement, said he had been arrested by Malaysian intelligence officers on Wednesday, but Malaysian authorities denied that.

Manhunt

Sri Lankan officials declined on Friday to say where he had been caught, citing diplomatic necessity.

"It is a sensitive issue and the government wants to respect the wishes of all parties involved," a senior Sri Lankan official told Reuters on condition of anonymity.

Thai authorities arrested Pathmanathan in 2007 and were ready to hand him over on condition their involvement was not known.

But he escaped after Sri Lanka publicised his arrest there, and Thailand denied he was ever in custody, diplomats with knowledge of the incident say.

Sri Lanka has stepped up diplomatic and intelligence efforts to hunt down Pathmanathan since he assumed the mantle of the new LTTE leader after Prabhakaran's death.

After a brief struggle with other LTTE officials overseas, which analysts say involved control of the hundreds of millions in Tiger assets stashed around the globe, Pathmanathan emerged as the new leader.

He pledged to create a government-in-exile to push the LTTE's vision a separate nation for Sri Lanka's minority Tamils in a non-violent and democratic way.

One of the original Tigers, Pathmanathan dodged authorities for nearly three decades and built the LTTE's smuggling, weapons procurement and fundraising capacity into a multi-million dollar enterprise known as the "KP Department".

At the height of his powers, KP operated a fleet of freighters for smuggling, dealt in arms bazaars from Eritrea, Afghanistan and Ukraine and raised millions for from fundraising appeals and outright extortion from expatriate Tamils.

Long believed to be in hiding in bases from Myanmar, Malaysia and Thailand, he had dozens of passports and more than enough money to buy his way out of trouble.

Security experts say the LTTE was earning between $200-300 million annually from smuggling, arms sales and extortion.

However, the LTTE's presence on US, EU, Indian and Canadian terrorist lists sharply curtailed his operations, and he re-emerged earlier this year when Prabhakaran named him the LTTE's head of international relations. – Reuters