A leading business association said Thursday it is setting up a trading post in the war-ruined north, in a bid to boost trade with farmers and fishermen in areas held by Tamil Tiger rebels.

"We plan to set up a midway trading post in Vavuniya so that farmers from the Wanni areas can sell to Colombo traders at market prices," Granville Perera, a member of the Federation of Chambers, told Dow Jones Newswires.

Vavuniya, 220 kilometers north of Colombo, is under government control, but close to the vast swathe of Wanni jungles held by the Liberation Tigers of Tamileelam. "We hope to get the project off the ground in six months," Perera said.

He said the federation, which represents mostly small and medium-scale industries, had received clearance from the Sri Lankan government. Farm and marine products do not generally come from Jaffna, 300 kilometers north of the capital, Colombo, due to the exorbitant shipping costs.

The government and the rebels signed a landmark cease-fire agreement in February and are working toward peace talks in June - the closest the island has come in seven years to resolving the 18-year-old civil war.

As part of improved relations, the government has lifted an embargo on goods from the south of the island to rebel-held territory. A highway that connects the region to the rest of the island, and has seen bloody battles in the past, has also been opened. Vavuniya lies on the highway.

"By giving the farmers a good price for their produce, we will be putting money in their pockets, while indirectly also helping ease the cost of living in Colombo," Perera said.