Rebels fighting against government forces appear to be losing ground in Zamboanga City in the southern Philippines.

About 100,000 people are believed to have been displaced during the 10 days of fighting, but now there are reports of troops moving from house-to-house, seeking out the last of the rebels and their hostages.

The military has warned the rebel holdouts that they faced two choices: surrender unconditionally, or "suffer the consequences and feel the weight of the suffering of so many innocent people in your hands," Lieutenant-Colonel Ramon Zagala, Philippine military spokesman, said.

Army officials told Al Jazeera on Wednesday that 12 soldiers had been killed and 115 others wounded in the fighting with suspected fighters of the Moro National Liberation Front (MNLF), who seek an Islamic state in the southern Philippines.

The officials also said that government forces killed 120 rebels and now controlled 80 percent of the areas that had been occupied by the fighters.

More than a 100 people who were held hostage by the rebels escaped on Tuesday, as the rebels engaged in deadly street battles with Philippine troops.

Hundreds of other civilians remain trapped, with some being used as hostages or human shields.

The standoff began last week, when hundreds of fighters invaded Zamboanga in a bid to derail peace talks.

The military said on Wednesday it had killed more than a hundred rebels, as it retook Santa Barbara and Santa Catalina in the centre of Zamboanga.

There has also been heavy fighting in Talon and Mampang, in the east of the city, but it was not known how many rebels remained there.

Police chief 'freed'

Against this backdrop of continued fighting, a local police chief who reportedly was abducted by the rebels has emerged free, after conflicting reports about his disappearance.

Senior Superintendent Jose Chiquito Malayo and three of his men were taken at gunpoint while trying to persuade some MNLF rebels to surrender, according to Mar Roxas, the Philippine interior secretary, and police officials.

"While trying to convince them, he was taken into custody or held hostage but he kept on convincing them until he succeeded,'' Roxas said.

Sources told Al Jazeera that the police chief was sent in to negotiate the surrender of the fighters.

Philippine President Benigno Aquino III has been in Zamboanga since Friday to oversee the handling of the worst security crisis his administration has faced since he came to power in 2010.

The MNLF, led by Nur Misuari, signed a peace deal in 1996, but the guerrillas did not lay down their arms and later accused the government of reneging on a promise to develop long-neglected Muslim regions in the south of the predominantly Roman Catholic nation.

The MNLF has become increasingly active in recent months as they have been overshadowed by a rival rebel group that engaged Aquino's government in peace talks organised by Malaysia.

The talks have steadily progressed towards a new and potentially larger autonomy deal for minority Muslims in the south.