The Japanese peace envoy to Sri Lanka, Yasushi Akashi, has said that the breakdown of the ceasefire may make it necessary to review Tokyo's aid.
Mr Akashi said he was worried that the end of the ceasefire may lead to more violence and more civilian casualties.
Japan is Sri Lanka's largest foreign donor, giving about $9bn in grants, loans and aid since 1985, including around $400m in 2007. Sri Lankan finance ministry figures show that Japan gave nearly $200 million of that between January and September last year.
"The termination of the ceasefire agreement may prompt the pursuit of a military solution of the conflict, with dire humanitarian consequences," Mr Akashi said, speaking during a trip to Sri Lankan just prior to the end of the Cease Fire Agreement on January 16.
The 2002 Norwegian brokered agreement came to an end after the Sri Lankan government unilaterally withdrew from it.
"A devolution package on which the government of Sri Lanka had been exerting considerable efforts must be drafted as soon as possible and be offered to the relevant parties, including the Tamil Tigers."
The Japanese envoy - who has visited Sri Lanka 15 times in an effort to end the conflict - said that his government was "gravely concerned" over Colombo's decision formally to scrap the six-year ceasefire with the rebels.
He was speaking at the end of a three-day visit marked by fierce fighting in the north.
Mr Akashi said that the future of Japanese aid would be taken "on the basis of very close monitoring and observation of the situation" which he said would be the subject of "continuous review".
"What the government does, does not do, will be important considerations," he said.
During the visit Mr Akashi had met with the Marxist Janatha Vimukthi Peramuna (JVP), the main left party, for an hour-long discussion.
"While Japan and other international donors give a lot of aid to Sri Lanka, Mr Akashi indicated that donors may call off aid, given the current ground situation," the JVP said.
Japan has so far not pledged any aid for this year, but it has also not halted any existing aid.
Japan provides nearly two-thirds of all international aid to the island - but has so far has not linked financial assistance to the fighting or to human rights despite mounting international concern over the country's rights record.
Tokyo and the island's other major donors had the previous Saturday voiced concern over Colombo's decision to scrap the truce, saying they feared it would lead to more bloodshed and stall peace efforts.
The financial backers, who include the United States, the European Union and Norway, also sought access to meet the Tigers in their territories in the north and urged Colombo to allow a UN presence to monitor rights abuses.
There was no immediate comment from the government. Sri Lanka has repeatedly rejected previous calls for a UN rights mission.
In Saturday's joint statement, the donor quartet urged warring parties to protect civilians and allow humanitarian agencies access to people in need.
Sri Lanka announced it would formally pull out of the six-year truce on January 16, saying the LTTE had used the ceasefire as a cover to rearm, recruit and attack troops.
The government now says that it is intent on defeating the Tigers militarily, while at the same time promising to finalise a long-delayed political devolution proposal within weeks.
However, the Tamil Tigers said last week that it was "shocked and disappointed" by the Sri Lankan government's decision and appealed to Norway, which brokered the truce, to remain engaged.
