A burning oil tanker began leaking diesel off Sri Lanka's coast, naval officials said Tuesday, fuelling fears of a major environmental disaster.

The Panama-flagged New Diamond, carrying 270,000 tonnes of crude oil and another 1,700 of diesel fuel, has been burning since Thursday.

A diesel oil slick was observed near the crippled vessel some 55 kilometres (34 miles) off the country's eastern coast in the Indian Ocean, the navy said, without specifying the size of the spill.

It said an Indian Coast Guard aircraft was deployed to spray dispersants on the leak to minimise the environmental damage.

The engine room and the super structure was burning, but the blaze had not reached the crude oil it was carrying from Kuwait to an Indian port, the navy said.

"The tanker is listing to the left. Diesel fuel from its tanks have leaked out as sea water used to fight the fire is drained from the super structure," a spokesperson said.

Sri Lanka's chief prosecutor, Dappula de Livera, told local marine authorities to pursue a claim for damages and order owners of the  Panamanian-registered vessel to tow it away from Sri Lankan waters.

The ship reported a fire while passing the country's east coast on Thursday after a boiler room explosion killed a Filipino crew member.

India and Sri Lanka have launched a major operation to battle the flames and prevent an environmental disaster in the Indian Ocean.

The New Diamond is much larger than the Japanese bulk carrier MV Wakashio, which crashed into a reef in Mauritius in July, leaking more than 1,000 tonnes of oil into the island nation's pristine waters.