What little most Britons know about Sri Lanka is coloured by the image of balmy hotels, a benevolent outlook on life and a fun-loving national cricket team. Yesterday's terrorist attack on a civilian bus in the town of Okkampitiya, which killed at least 31 people, should force a rethink. The separatist Tamil Tigers terrorists were almost certainly responsible, though they routinely deny attacking civilian targets.

The Tigers continue to demand a separate state in the north for the Tamil minority. Meanwhile, the Government, backed by the Sinhalese majority, has redoubled its intransigence since the election of Mahinda Rajapaksa as President.

Three things are significant about this terrorist atrocity. First, there is the timing, which coincided with the official expiry of a six-year-old ceasefire agreement. In truth, the ceasefire had long since collapsed on the ground, but significantly the Tamil Tigers managed a major terrorist incident even on a day when the Government must have been on high alert. This was not just a resumption of arms but a signal of intent. Secondly, the location, 150 miles southeast of the capital Columbo, is deep into the usually peaceful south. This is Sri Lanka's tourist territory, so the attack deals a serious blow to one of the country's few sources of foreign income. Third, this was a brutally soft target - the Government says there were children on board - underlining the Tigers' willingness to use any means they see fit.

Sceptics have long suggested that the original ceasefire had been a truce of convenience. Both sides, with coffers running low, may have simply wanted time and space to re-arm and re-recruit.

The attack certainly marks a steady decline on many fronts. The Tigers, while running a de facto government in the north since the ceasefire, have been gradually losing their strongholds in the east. Their international reputation has sunk lower with claims that they have been extorting money from Sri Lankan Tamils living in Britain. It will not be difficult for the Government to portray this bombing as evidence of Tamil desperation: without the means or imagination to wage proper war, they have resorted to blowing up buses meandering through undisputed territory. The conflict could yet become more gruesome.

What should the Sri Lankan Government do? It should start by getting its own house in order. Under the hardline President Rajapaska, it has crept quietly towards becoming a Buddhist form of police state. So grave are its human rights abuses - abductions, murders and dispossessions are a daily occurrence - that Australia government recently drew no distinction between the Government and the Tigers regarding human rights, and hinted that its Tamils not return to their homeland. Now, as the Norwegian commission that brokered the old ceasefire retreats, Sri Lanka needs a neutral international presence more than ever. India, the somnolent superpower on the dispute's doorstep, has to volunteer to renew an involvement that waned after the assassination of Rajiv Gandhi.

As we saw for decades in Northern Ireland, terrorism has its own self-perpetuating logic until leaders on both sides are capable of shifting the terms of debate. But if poor leadership continues at home, and the international community remains indifferent, Sri Lanka will not be perceived for long as an island paradise by anyone.