The Jaffna peninsula in Sri Lanka's far north was worst hit by the country's 37-year civil war that killed at least 100,000 people, mostly Tamils, and remains heavily militarised.
Officially Modi is there to launch construction of a cultural centre funded by India and formally hand over 50,000 houses to families that lost their homes in the decades of fighting.
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But his visit is also a demonstration of regional superpower India's support for Sri Lanka's Tamils, who share close cultural and religious ties with those in the southern Indian state of Tamil Nadu.
It comes a day after he held talks with Sri Lanka's new President Maithripala Sirisena and urged the government to fully implement a 1987 constitutional provision giving Tamils greater autonomy.
"Sri Lanka has lived through decades of tragic violence and conflict," Modi said on Friday.
"You have successfully defeated terrorism and brought the conflict to an end. You now stand at a moment of historic opportunity to win the hearts and heal the wounds across all sections of society."
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The Indian premier was welcomed to Jaffna by the region's top Tamil politician C V Wigneswaran, who asked him to guarantee a political settlement for Sri Lanka's Tamils.
"We seek justice and fair play and dignity," Wigneswaran said, after Modi told parliament that Indian-style "cooperative federalism" could work in the majority Sinhalese nation.
A Tamil council was elected in September 2013, five years after the war ended, but it lacks legislative authority.
Modi is only the second foreign leader to travel to Jaffna after British Prime Minister David Cameron, who travelled there during a Commonwealth summit in Colombo.
Earlier Saturday he launched a train service in another area hit by the war and worshipped at a Buddhist temple in central Sri Lanka where thousands venerate what they consider to be the world's oldest tree.
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Indian loans have helped restore rail services to Jaffna and Modi has pledged $318 million to rehabilitate Sri Lanka's dilapidated railway network.
India has long supported greater autonomy for the minority group, but Suresh Premachandran, a Tamil lawmaker from Jaffna, said Modi's comments were the strongest in a long time.
Sirisena came to power in January promising ethnic reconciliation and accountability for alleged war crimes committed by security forces under the command of former leader Mahinda Rajapakse.
Tens of thousands of troops are still garrisoned in Jaffna despite international calls for a scaling-back of numbers, although there were no soldiers in evidence during Modi's visit.
While reconstruction has begun in some parts of Jaffna city, many neighbourhoods and surrounding villages are still strewn with rubble as a legacy of the heavy bombardments that they endured over the decades.
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