MANILA (AFP) - President Rodrigo Duterte offered self-rule to the Philippines' Muslim minority on Monday (July 17) in an attempt to defeat Islamist militants who have seized a southern city in the gravest challenge to his year-old rule.

Duterte hopes the promise of autonomy will persuade Filipino Muslims to reject the Islamic State in Iraq and Syria (ISIS) group, whose followers still control parts of Marawi after nearly two months of fighting that had left more than 500 people dead.

Duterte vowed to shepherd through Congress a "Bangsamoro Basic Law" Bill jointly written and submitted to him Monday by government officials and the country's largest Muslim guerrilla group, the Moro Islamic Liberation Front (MILF).

"This moment is a significant step forward in our quest to end centuries of hatred, mistrust and injustice that cost and affected the lives of millions of Filipinos," he said in a speech to MILF leaders and government officials.

Both sides said that giving the mainly Catholic nation's large and largely impoverished Islamic minority a better choice was crucial to heading off the lure of violent extremism.

"These misguided people have filled the vacuum created by our failure to enact the basic law, and feed into the frustration of our people," MILF chairman Murad Ebrahim told the same gathering, referring to the Marawi gunmen.

The decades old Muslim insurgency has claimed more than 100,000 lives in the Mindanao region that includes Marawi.

The MILF signed a peace treaty with Duterte's predecessor Benigno Aquino in 2014 but Congress refused to pass the self-rule Bill - a key provision of the accord.

Small rebel factions began pledging allegiance to the ISIS soon afterwards. The Marawi attack on May 23 was their first major action, forcing Duterte to impose martial rule across Mindanao.

The chief government peace negotiator, Irene Santiago, said Manila expects the Bill's passage within a year.

"The next 12 months are full of opportunity but also fraught with so much danger. The dangers are staring us in the face: violent extremism, the source of the crisis in Marawi," Santiago added.

An Autonomous Region in Muslim Mindanao has been in place in parts of the south since after a rival faction, the Moro National Liberation Front (MNLF), signed peace with Manila in 1996.

However it had failed to end violence and rebellion.

Santiago said both the MILF and MNLF helped to draft the new self-rule Bill giving all sides optimism about its passage.

Duterte is also set to decide within the week whether to extend military rule over Mindanao.

The constitution limits martial rule to 60 days, a safeguard against abuses put in place after the downfall of the Ferdinand Marcos dictatorship.

However Congress can authorise an extension.

The military said there were still 60-80 gunmen holed up in about 500 Marawi houses and buildings after weeks of day and night air strikes and artillery pounding.

About 300 civilians also remain trapped in the area and some of them have been taken hostage, the military said.