ONE OF THE WORLD'S most notorious terrorists seems to be cornered. His hide-out is a 10th its size of a year ago. Funding from followers in places such as Mount Waverley and Dandenong has been all but stopped, and the hearts and minds of once-loyal insurgents are turning. It seems a rare win in the war on terror.

No, sadly, it's not Osama bin Laden but, as 21 million Sri Lankans see it, a problem of a more intractable kind — the leader of the militant Tamil Tigers.

Over the past 30 years, civil war — part of a millenniums-old conflict between the island's Sinhalese and Tamil communities — has brought the Sri Lankans' otherwise gorgeous tropical paradise to 20th on the list of the world's 60 failed states as recently ranked by Foreign Policy magazine, alongside Afghanistan, Zimbabwe and Somalia.

It has been a miserable and — to the outside world — largely anonymous conflict on an island much-loved by Australians seeking echoes of the Raj: nearly 80,000 dead, a million refugees, a near-bankrupt government and two generations in chronic poverty who have never known peace.

But the horror could soon be over. A brutal 18-month government offensive in the Tamil lands of the swampy north-east, far from the spas and villas of the south's palm-fringed beaches, has the Tamil Tiger separatists devastated. The Tigers once claimed a third of the island, a de facto state they called Eelam. It had customs, a central bank, even a sports ministry. When I drove into the Tiger capital, Kilinochchi, to interview the political leaders in 2003, I got a $25 on-the-spot and fully receipted speeding ticket from a patrolwoman who nabbed me with a spanking-new speed camera made in Canada.

But Kilinochchi has fallen, the strategic Elephant Pass to Jaffna too, and now the last redoubt, the coastal hamlet of Mullaitivu. Now the Tigers defend a tiny tract of seaside jungle that is still recovering from the 2004 tsunami. No more than 3000 Tiger guerillas, strangled of arms and supplies, are facing 40,000 soldiers from a hundred Sri Lankan brigades. The Jaffna-Colombo road — the Highway of Death, as it is known — is open again, only now it is troops, not trade, streaming along it to supply Eelam's Sinhalese conquerors.

In Colombo, Sri Lanka's commander-in-chief, President Mahinda Rajapaksa, exults. The capital's streets are choked with victory bunting, the elation tempered only by the painful knowledge that the Tigers have been cornered before, only to strike back with deadly stealth in the Sinhalese heartland. Locked-down Colombo is pock-marked with reminders of suicide bombings, and locals know to tread warily.

To get a sense of the strength of feeling on both sides, in the past month, seven Tamils have burned themselves to death in protest at the Government offensive. Most were in the Indian state of Tamil Nadu, but last week a 26-year-old London-based Tamil burnt himself to death outside the United Nations offices in Geneva.

Meanwhile, the UN this week accused Tamil rebels of using force to prevent thousands of civilians leaving Sri Lanka's northern war zone, as well as forcibly recruiting some into the Liberation Tigers of Tamil Eelam (LTTE).

As ancient enmities go, the Yugoslavs have nothing on the Sir Lankans. In 1989, Slobodan Milosevic railed that the 1389 Battle of Kosovo remained unavenged by the Serbs, nationalist nonsense that ushered in the Yugoslav wars of the 1990s. But I've seen placid Sri Lankans — professionals to tea-pickers, cricket-lovers all — nearly come to blows over which Indo-Aryan/Dravidian culture first got to their island from India several centuries before Christ, and what language they encountered when they got there.

Sri Lanka today is anything but the peaceful Ceylon that Michael Ondaatje recalled in Running with the Family, his 1982 faux-memoir of his childhood, in which everyone was a cousin in an eccentric cultural masala.

Rajapaksa, elected by a razor-thin margin in 2005, is the only world leader to have appropriated the Bush doctrine of preventative anti-terrorist strikes and made it a winner, militarily and electorally. Approval for his expensive war runs above 80 per cent in some polls, and he is set to walk away with this year's poll. Posters have been raised around the country praising "Mahinda Thought" and likening Rajapaksa to Dutugemunu, a second-century Sinhalese king who, so says the island's great Buddhist chronicle, the Mahavamsa, slew the Tamil monarch Elara to become the first to reign over the entire island.

Every Sri Lankan knows the story, and Sinhalese, who make up 70 per cent of the population, often tell it with particular relish. The imagery doesn't bode well for the ethnic reconciliation Sri Lanka so desperately needs, but what is rarely remembered is what happened after Elara's death. "Looking back upon his glorious victory, great though it was, Dutugemunu knew no joy, remembering that thereby was wrought the destruction of millions." The king built a tomb for the slain Elara and demanded passers-by pay their respects.

But Rajapaksa, a former human rights lawyer, is unlikely to do that for the Tigers' "great leader", the abandoned Velupillai Prabhakaran. The 54-year-old "Prabha" founded the LTTE in the 1970s to confront Sri Lanka's gathering Sinhalaisation, the pogroms and discrimination that prompted the mass migration of capable Tamils, the country's business and administrative class, to Canada, Australia and Britain. The cause may have been just, but Prabhakaran was no Nelson Mandela. He carried out his first assassination in 1975. The Tigers are the only terrorist group to have assassinated the leaders of two countries, Sri Lankan president Ranasinghe Premadasa in 1993 and Indian prime minister Rajiv Gandhi in 1991. When US troops trawled through al-Qaeda's Kabul safe houses after September 11, 2001, they found Tiger terror-training manuals in the rubble.

With possibly the world's most pervasive personality cult, Prabhakaran's rule of Eelam has been brutal and absolute. Would-be suicide bombers must send him a job application for his approval to blow themselves up. The successful are granted their last meal with him before their mission, the only time most Tamils ever see him.

Rajapaksa was incensed at the daring air raid the Air Tigers made on Colombo in April 2007, while he was at the Cricket World Cup final in Barbados.

He junked a 2002 Norwegian peace treaty, and his army has taken almost every Tiger stronghold in Eelam since. Now his men are sweeping Mullaitivu, where the vanished Prabhakaran is said to be sheltered in a luxurious bunker 30 metres beneath the jungle, which is being strafed by Colombo's Israeli-supplied air force. There is a decidedly fin de regime air about it all.

But with victory comes problems. Tiger cadres, including Prabhakaran, each dangle a cyanide capsule around their necks to bite into if captured, lest they give away operational secrets to the enemy. But will Prabhakaran swallow his, if it comes to that? The Tigers regard themselves as the sole Tamil voice, and the movement is steeped in martyr culture. Though Hindu, they don't cremate their war dead but bury them in scores of elaborate cemeteries across the north-east. When Prabhakaran, the Tamils' Louis XIV, goes, so does the LTTE. At least, that seems to be Colombo's thinking. Rajapaksa's generals want to kill Prabhakaran. But even if Prabhakaran escapes, where can he go?

Nowhere seems to be the answer. He has killed, or at least tried to, most of the foreign friends he might need now. However worthy the cause, no Western country will take a man so soaked in blood, and, post-Mumbai, it's hard to see any neighbour providing sanctuary — Sri Lanka is not important enough to want leverage over, anyway. In Nepal, Maoist leader Prachanda is busy proving his legitimacy. Prabhakaran found sanctuary in Madras in the 1980s, but modern India is unlikely to be a haven for him. Delhi has made it clear it wants the Tiger leader extradited to India if he is taken alive, to face trial for the 1991 assassination of Sonia Gandhi's husband, Rajiv. Rajapaksa would risk relations with Delhi if he didn't give him up, and his own victory lustre at home if he did. Prabhakaran's scalp would be a genuine war trophy for Rajapaksa as he turns the island into the elective dictatorship many Sri Lankans feel is in their future.

Prabha's death would solve the Indian problem for Rajapaksa but would it solve Sri Lanka's Tamil problem? This is the dilemma for any legitimate government faithful to the rule of law. Secular Indonesia executed its Bali bombers last year, risking martyrdom among its Islamist faithful. In Cambodia, Pol Pot died naturally, protected by Thailand, China and Khmer Rouge loyalists, having never been tried for genocide.

Peru's Alberto Fujimori chose a different tack after capturing Abimael Guzman, the Maoist Shining Path leader, in 1992. Fujimori humiliated him and neutralised Shining Path by demystifying Guzman as being anything but the Superman he had been portrayed as. As Rajapaksa ponders how to win war-weary Sri Lanka's peace, he might note that Guzman now shares a life behind bars with Fujimori, who is awaiting trial in Lima for abuses of office.

And the Shining Path are back again, decades later, with new demagogues at the top.