Philippine authorities have blamed a notorious group of Islamic militants for the bombing of a night market in President Rodrigo Duterte's home town that killed at least 14 people.

Key points: The government says the bombing was likely 'retaliation' by the Abu Sayyaf

The government says the bombing was likely 'retaliation' by the Abu Sayyaf President Duterte recently stepped up the offensive against the militant group

President Duterte recently stepped up the offensive against the militant group Duterte has declared a 'state of lawlessness' granting the military extra powers

An improvised explosive device tore through the bustling market in the heart of Davao city and close to one of its top hotels just before 11:00pm local time on Friday.

Authorities said the Abu Sayyaf, a small band of militants that has declared allegiance to the Islamic State group, most likely carried out the attack in response to a military offensive launched against it last week.

"The office of the president texted and confirmed that was an Abu Sayyaf retaliation. For the city government side, we are working on that it is an Abu Sayyaf retaliation," Davao mayor Sara Duterte, who is also the president's daughter, told CNN Philippines.

National Defence Secretary Delfin Lorenzana said the Abu Sayyaf had struck back after suffering heavy casualties on its stronghold of Jolo island, about 900 kilometres from Davao.

"We have predicted this and warned our troops accordingly but the enemy is also adept at using the democratic space granted by our constitution to move around freely and unimpeded to sow terror," Mr Lorenzana said in a statement.

Mr Duterte, who was in Davao at the time of the attack but not near the market, told reporters before dawn on Saturday that it was an act of terrorism, as he announced extra powers for the military.

At least 14 people were killed and another 67 were wounded in the explosion, police said. Sixteen of the injured were in critical condition, a local hospital director told reporters.

President Duterte visits injured victims of the bomb blast. ( Supplied: Presidential Photographers Division/AFP )

Abu Sayyaf rejected Duterte's peace overtures

Davao is part of the southern region of Mindanao, where Islamic militants have waged a decades-long separatist insurgency that has claimed more than 120,000 lives.

Mr Duterte had been mayor of Davao for most of the past two decades, before winning national elections in a landslide this year and being sworn in as president on June 30.

He became well known for bringing relative peace and order to Davao with hardline security policies, while also brokering deals with local Muslim and communist rebels.

Mr Duterte has in recent weeks pursued peace talks with the two main Muslim rebel groups, which each has thousands of armed followers.

However, the Abu Sayyaf, a much smaller and hardline group infamous for kidnapping foreigners to extract ransoms, has rejected Mr Duterte's peace overtures.

In response, Mr Duterte deployed thousands of troops onto the small and remote island of Jolo to "destroy" the group.

The military reported 15 soldiers died in clashes on Monday, but also claimed killing dozens of Abu Sayyaf gunmen.

On Saturday morning, Mr Duterte declared a national "state of lawlessness", which his security adviser said gave the military extra powers to conduct law enforcement operations normally done only by the police.

President Duterte inspects the bomb site. ( Supplied: Presidential Photographers Division/AFP )

AFP