Talks with the leaders of about 150 military rebels holed up in the Makati financial district continued into late evening more than two hours after President Gloria Arroyo's ultimatum for them to stand down or face assault expired.

Defense Secretary Angelo Reyes, one of three officials that the rebels want sacked, said he would respect Arroyo's decision on his future but warned that treating the rebels with kid gloves would have disastrous consequences for the Philippines' international reputation as well as with national security.

The rebels also want national police chief Hermogenes Ebdane and military intelligence chief Brigadier General Victor Corpus sacked.

Opposition Senator Vic Sotto, one of the negotiators, said the rebels agreed to the creation of an independent committee, with one of their colleagues as members, to investigate their allegations that the military brass is selling munitions to rebel groups they themselves are fighting.

Arroyo aide Mike Defensor said he believed the rebels would be willing to stand down if they were allowed to go back to barracks, which would mean waiving court-martial proceedings threatened by the president against them.

"I serve at the pleasure of the president," Reyes said.

However, he reminded the public that "these officers and men committed this felonious act of taking over a building, a commercial center, and instead of court-martialling them you're having the secretary of defense investigated."

He said he opposed to proposals to allow the rebels to march back to barracks.

"To me, if the result of this entire tragic episode is for the secretary of defense, the director of military intelligence and the police chief being asked to resign because of some disgruntled officers who staged a coup, then we're in deep shit."

Reyes said he himself has recommended to Arroyo that the government create an independent committee to investigate the rebel allegations against him.

On the charge that the government sold munitions to the enemy and instigated terrorist bombings in the south, Reyes said: "You have to have your head examined if you believe that."

Should the government agree to waive the rebels' prosecution, "how are we going to discourage future coups?" he said.

"I'm recommending that they be dealt with according to the law."

WAR.WIRE