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COLOMBO, July 25 (Reuters) - Tensions have calmed in Sri Lanka's restive east as the island's government and Tamil Tiger rebels negotiate ways to end a standoff threatening a 3-1/2-year ceasefire, truce monitors and police said on Monday.

The government has proposed new measures to ensure the safety of Tiger cadres when travelling in military-held areas after a spate of attacks, while the rebels have yet to follow through on a threat to use armed escorts that could rupture the truce.

But in the military-held Jaffna peninsula in the island's north, residents fret that the rash of killings the military and the Tigers blame on each other could reignite a two-decade civil war that has already killed over 64,000 people.

"The government side has come up with some additional proposals to increase the security of the convoys," said Helen Olafsdottir, spokeswoman for the Nordic Sri Lanka Monitoring Mission, which oversees the 2002 ceasefire. "There is less rhetoric around these talks now."

"The proposals are a step in the right direction, ... very constructive," she added, declining to elaborate. "It boils down to making it more difficult for attackers to identify the bus and attack one bus out of the whole convoy."

The Tigers were not immediately available for comment.

Dozens of rebel cadres, police, soldiers and civilians have been killed in recent months despite the ceasefire that has given Sri Lanka its longest taste of relative peace since the Tigers' struggle for self-rule began in earnest in 1983.

SICK OF WAR

The prospect of a return to the incessant shelling that scarred swathes of Sri Lanka's rebel-held north, displaced thousands of people from their homes and choked the $20 billion economy, is haunting civilians sick and tired of fighting.

"We have been displaced three times," said 29-year-old Chellappah Rajeswaran, tending to his grocery store in Jaffna and recalling how he and his family were among hundreds of thousands of residents who fled in a mass exodus in 1995 ahead of an army offensive.

"We had to live under trees for a few days until we found a permanent place," he added. "I dread to think of another war and displacement. I have experienced too much hardship for my age."

Earlier this month the Tigers withdrew their cadres from military-held areas -- where they are allowed under the terms of the truce - to areas they control, interpreted by some as preparation for war.

But the withdrawal has actually helped ease tensions because the rebels are no longer exposed to attacks that the military blamed on feuding between the mainstream Tigers and a renegade faction.

"Things have quietened during the last few days. No incidents have been reported," said Rohan Abeywardene, Deputy Inspector General for the eastern districts of Ampara, Batticaloa and Trincomalee.

"So far we have not encountered anybody trying to travel in government-controlled areas with weapons," he added. "If they do, it's a violation of the ceasefire."

Analysts say any return to stalled peace talks aimed at forging lasting peace is a long way off, and a Supreme Court decision to freeze a hard-fought government pact to share $3 billion in tsunami aid with the rebels has only clouded the picture further.

(Additional reporting by Joe Ariyaratnam in JAFFNA)