By Frances Harrison BBC correspondent in Sigiriya

Tourists are paying up to $1,000 a night in some luxury hotels

Rooms that were deserted during years of civil war with Tamil Tiger rebels are now fully booked, even in the low season.

The island's tourism industry is benefiting from business that would have gone to Bali or Kenya before the bombings, or to the Far East were it not for the Sars virus.

And there's now a determined attempt to go more upmarket, as Sri Lanka sheds its image as a cheap package destination.

Luxury hotels like the Lighthouse in Galle say they've doubled their profits in the last year, and are now reinvesting the money in renovation, having built a new pool and spa.

North-east 'has more potential'

The Elephant Corridor in Sigiriya is the best-known achievement in the struggle to raise room rates.

It's an eco-friendly, luxury resort in the jungle that charges from $150-$1,000 a room.

Its chairman, Prasanna Jayawardene, says many people in the industry said they simply couldn't get tourists to pay that kind of money.

PRASANNA JAYAWARDENE I would say that we are about to take off again - we are now beginning to get the peace dividend

He worked in the hotel industry in Mauritius, and says he sees things differently from "frightened" colleagues who spent the war years in Sri Lanka.

Well-heeled tourists are lured to the resort by the prospect of elephant and horse-riding, bird-watching, archery, sightseeing or just lazing by the pool.

Mr Jayawardene is now involved in a project to build two luxury hotels in Jaffna - the heart of the war zone - as well as a motel in Kilinochchi, the rebel headquarters.

He has a Tamil investor willing to take a risk and go where neither the government nor many aid donors have yet gone.

His view is that it's the north and the east of Sri Lanka that will drive the future of tourism - despite the fact they're devastated by conflict.

"I believe there's more potential in the north and east because their minds are more open to tourism than in the south - we had to struggle to keep the tourism facilities alive there," Mr Jayawardene says.

And he has few worries about dealing with the Tamil Tiger rebel group: "They have been rebels for 20 years, but they have been our people for thousands of years and they will carry the rest of our country into the mainstream, especially in terms of tourism."

Wait and see

It's clear the north-east could be an opportunity to start afresh.

It's an area full of natural beauty, beaches and wildlife where people are open to business and eager for change.

Big international players are unlikely to come onto the scene until a final peace deal is signed.

But there has been some interest with big international hotel chains talking about taking out long-term leases on run-down hotels in Galle and Kandy and holding on to them to see what happens.

In the meantime, it's Tamil businessmen and expatriates who are investing in Sri Lankan tourism lured by the country's still fragile peace process.

The government is lagging behind. So far the Tourism Ministry has only offered preferential loans to five small hotels in the east to carry out repairs on war-damaged properties.

There's been little tangible planning to back up the vague rhetoric of the Tourism Board about the potential of the north-east for tourism.

'Giant leap'

Hotel managers like Mr Jayawardene are now talking about the possibility of achieving annual arrival figures of five million tourists in a decade from now.

At present Sri Lanka is pushing to reach half a million visitors.

SRI LANKA TOURISM Tourist arrivals up by 22% 500,000 visitors in 2003 Most from India and Britain Hotels full, even in low season Benefiting from Sars and Bali, Kenya bombings

If the industry does take off, it's going to need a well co-ordinated plan for training staff as well as money to build more rooms.

The government does run a hotel training school with eight branches around the island, including in former conflict areas.

These days trainees should have no trouble finding a job.

"I think we have had a giant leap - it's like a dream coming true," says the principal of Sri Lanka's Institute of Tourism and Hotel Management, S Kumar Thambiyah.

Twenty years of war meant the best in the industry went abroad to the Maldives or Seychelles or further afield.

Investment in training was minimal. The result is service is not what it should be in most hotels, where command of English is poor and food nowhere near the standard of luxury hotels in the Far East, for example.

If there is going to be a spurt in tourism created by the private sector, the government needs to be planning not just to meet present demand but future growth.

The old attitudes of riding out the war crisis need to be replaced with a new vision of turning war zones into tourist zones.