Two Philippine soldiers were killed and 21 other people were wounded in a gunfight on Friday as security forces caught up with Abu Sayyaf guerrillas holding 20 hostages including three Americans, officials said.
The Muslim rebels said two of the hostages were wounded in the three-hour clash in the southern island of Basilan, but the military dismissed the claim.
Military spokesmen said two soldiers were killed and 14 other armymen were wounded when the platoon ran into about 100 guerrillas at their jungle camp. There was no word on possible casualties among the hostages and gunmen.
Local officials listed seven civilians injured, all hit with shrapnel apparently from wayward shells. The army denied using artillery.
"The defense perimeter of this kidnapping group for the temporary base that they have established must have been breached by our troops," Brigadier General Edilberto Adan Adan said in Manila.
The firefight was the first contact of any sort with the kidnappers since they seized tourists in an upmarket resort off the western island of Palawan on Sunday and fled southeast by boat across the Sulu Sea.
Adan said troops and air support are rushing to cordon off a 180 square-kilometer (72 square-mile) area, while naval vessels would quarantine the 1,300 square-kilometer island. He gave no timetable for the operation.
Abu Sayyaf spokesman Abu Sabaya renewed a threat to slaughter the hostages.
President Gloria Arroyo's spokesman Rigoberto Tiglao said they want unspecified cash for the victims, who include US couple Martin and Gracia Burnham, Kansas natives doing Christian missionary work in the Philippines, and Californian Guillermo Sobrero.
Sobrero was born in Peru and became a naturalized American just three weeks ago, the Peruvian embassy in Manila said.
About 1,200 US troops including elite Marines and Navy SEALs began annual naval maneuvers with local troops off the northern Philippines on Friday, but Manila insists none of them are involved in the rescue attempt.
"No assistance from the United States is being received at this time," Adan said.
Using a satellite telephone, Abu Sayyaf spokesman Sabaya called up a radio station in nearby Zamboanga city to report that troops "opened fire on the Abu Sayyaf and the hostages (who were) bathing and swimming in the river."
One of the women hostages, Teresa Ganzon said: "Please refrain from this military action that has made us so afraid. These encounters are going to cost us our lives."
But Adan said "we are not thinking of a cessation of hostilities here. We want to maintain contact with this terrorist group so they cannot escape."
Tiglao said a government "intermediary" is in contact with the kidnappers, who "sent a message that, as we always have known, this has always been for ransom money."
But he ruled out ransom and said the government would talk to them only "if they would be willing to lay down their arms or release their hostages."
The 1,100-member Abu Sayyaf are self-styled Muslim separatists who engage in bombings and kidnappings in a campaign to set up an Islamic state in the southern third of the mainly Roman Catholic Philippines.
They seized 21 people including 10 western tourists from the Malaysian resort of Sipadan last year and shipped them to Jolo island in the southern Philippines, ransoming off all but one of them for millions of dollars -- BASILAN, Philippines (AFP)
They beheaded two Filipino hostages during a military a rescue attempt in Basilan last year.
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