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President Chandrika Kumaratunga says she will go ahead with her government's plan for a joint council with the Tamil Tigers to disburse the aid, despite growing protests and threats from her political allies.
Kumaratunga's coalition partner, the Marxist People's Liberation Front, has threatened to withdraw -- possibly causing the government to collapse -- if she does not renounce the aid sharing plan by Wednesday night.
The Marxists bused in supporters from outlying villages for the rally at Lipton Circus, just three km from the president's house. Shouting slogans and holding banners that said "How do we share government powers with terrorists?," the demonstrators marched through the streets as rifle carrying policemen looked on.
"The president is going to commit an irreversible blunder," Marxist lawmaker Wimal Weerawansa told supporters. "Anything given away through a legal document can't be taken back."
On Monday, police fired tear gas to stop 5,000 protesting students from reaching Kumaratunga's home.
"We have taken all measures to ensure that the security cordon of the high-security areas are not breached," police spokesman Rienzie Perera said Tuesday.
Critics say the aid deal threatens the country's sovereignty and helps the Tigers in their quest to carve out a separate state.
The co-chairs of the Sri Lanka Donor Group -- the US, Japan, the European Union and Norway -- threw their support behind Kumaratunga's proposal, saying "such a structure will facilitate effectiveness and equity in tsunami assistance, and can help build confidence between the two sides."
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The statement came after Kumaratunga sought help from former Prime Minister Ranil Wickremesinghe during a rare, hour-long meeting Monday.
Wickremesinghe's United National Party will give conditional support to her aid-sharing plans, sources close to the former prime minister said.
Wickremesinghe signed a 2002 cease-fire with the rebels that halted Sri Lanka's 19-year-old civil war. But Kumaratunga dismissed his government three years ahead of schedule last year, accusing him of being soft with the rebels.
The Tigers are demanding a say in how aid gets distributed to rebel-controlled Tamil-majority areas following the devastating December 26 tsunami, which killed at least 31,000 people in Sri Lanka.
They have complained that assistance has not reached Tamil areas fast enough since the disaster.
Kumaratunga has promoted her aid-sharing plan as a golden opportunity to forge peace with the guerrillas.
But public support has been weak. Buddhist monk Dambara Amila is fasting to protest the deal, and warned Monday that the protests could be expanded drastically.
Kumaratunga has called a meeting of 1,000 Buddhist monks for Friday to try and gain their support, the state-run Daily News reported Still, saffron-robbed monks joined in Tuesday's rally.
The Tigers began fighting in 1983 for a separate state for ethnic Tamils, accusing the majority Sinhalese of discrimination. The two sides signed the cease-fire in 2002 after the conflict claimed 65,000 lives, but peace talks have stalled since 2003.