Three Muslim rebels and two soldiers were killed Friday in a day-long gunbattle between troops and Al-Qaeda-linked Abu Sayyaf extremists blamed for beheadings and kidnappings in the southern Philippines, the military said.

The fighting began as part of an operation to capture Abu Sayyaf commander Puruji Indama, military spokesman Lieutenant Colonel Ramon Zagala said in a brief statement, and sporadic gunfire continued into the night.

"As of this time, 29 WIA (soldiers wounded in action) and two KIA (soldiers killed in action). Enemy, three killed," Zagala said.

The gunbattle with Indama's band of about 20 fighters is centred in a rural area of Basilan, around 900 kilometres (560 miles) south of the Philippine capital Manila.

Basilan town official Alton Angeles said he saw two helicopter gunships heading to the scene of the fighting but the military would not confirm this.

Indama, who has a bounty of 3.3 million pesos ($74,500) on his head, has been blamed for holding foreigners for ransom in the southern Philippines over the years and is notorious for beheading and mutilating victims.

The rebel chief gained prominence when he helped lead an attack on a military convoy in 2007, killing 14 soldiers, beheading many of them.

The military launched the attack in response to Indama's recent extortion demands on workers building a vital road on the strife-torn southern island, Zagala said.

Abu Sayyaf is a self-styled Islamic militant group which was set up in the 1990s with seed money from the late Osama bin Laden's Al-Qaeda network, and has been blamed for the worst terror attacks in the country's history including bombings.

Its militants have defied US-backed military campaigns against it by melding into and drawing support from Muslim communities in the southern Philippines who feel they have been persecuted for centuries by Christian rulers in Manila.

Abu Sayyaf members are also believed to have been involved in the kidnapping of a Chinese tourist and a Filipina worker from a Malaysian dive resort on April 2.

It is thought the hostages have been hidden on the southern Philippine island of Jolo.

Jolo and Basilan, which are about 70 kilometres apart, are both known strongholds of the group.

But Zagala said the Basilan operation was not linked to the kidnapping in Malaysia.

"This is very specific. It is concentrated on Puruji Indama. He has long been targeted. It is separate from the kidnapping incident. There are other groups who are tasked to do that search," he said.

President Benigno Aquino's spokesman Herminio Coloma said on Friday the Philippine police were "doing everything that is possible" to track down the kidnappers.