* Sri Lanka says fishermen still held
* To face court appearance on Tuesday
BEIJING/COLOMBO, Aug 6 (Reuters) - Sri Lanka's navy said on Monday it was still holding 37 Chinese fishermen to appear in court on charges of fishing within its waters, contradicting a report by China's Xinhua state news agency that they had been released.
Sri Lanka arrested the fishermen on Sunday night for fishing in Sri Lankan waters. They were aboard two trawlers off the country's east coast town of Batticaloa, Xinhua said.
"They are in our custody and they have not been released yet," Sri Lankan Navy spokesman Kosala Warnakulasuriya told Reuters.
"They are being held in Trincomalee," he said, referring to the island nation's eastern port city. "They will appear in court tomorrow and they are still on the boat."
The Chinese state news agency earlier had said Sri Lanka had released all 37 of the detained fishermen.
China is the island nation's largest lender in the last two years and the arrests could be a test for the increasingly close ties between Beijing and Colombo.
The Chinese embassy had "urged Sri Lankan authorities to handle the issue in accordance with the law, sort out the truth and release the Chinese fishermen as soon as possible", Xinhua said.
Sri Lanka's location astride an ancient trade route in the Indian Ocean makes it of strategic commercial and military interest to the United States, India and China.
China has been competing for influence in Sri Lanka with India, traditionally the island's most important ally.
Beijing has lent Sri Lanka hundreds of millions of dollars to build ports, roads, railways, power plants and a new airport, fuelling speculation China wants military bases on the island, something denied by Sri Lanka.
The incident was not the first involving Chinese fishermen this year. In July, a Russian coastguard ship detained 36 Chinese fishermen after firing at Chinese vessels that had been fishing for squid in Russia's far eastern Primorsky region.
Earlier this year, the Philippines and China were caught in a months-long standoff over Chinese fishing boats in disputed waters near Scarborough Shoal, a horseshoe shaped reef in the South China Sea. (Reporting by Ben Blanchard and Michael Martina in Beijing and Shihar Aneez in Colombo; Editing by Robert Birsel and Michael Roddy)