LAMITAN, Philippines (Reuters) - Muslim rebels, using child hostages as human shields, broke through a military cordon around a hospital in the southern Philippines on Sunday and escaped with American and Filipino captives, officials said.

But just hours later, fighting had resumed in hills two miles away. Nearby, troops found the headless bodies of two Filipino hostages, apparently killed by the rebels some days ago, military officials said.

Five Filipinos, from among 20 people kidnapped by the Abu Sayyaf rebels seven days ago from an island resort, escaped during the overnight confusion as the bandits slipped out of a hospital and a church that they had seized on Basilan island.

Four other captives had escaped during the fighting in Lamitan town, on Basilan's northern coast, on Saturday.

Troops found the headless bodies of two Filipino men in the jungles near Lamitan and officials said the victims were among the initial 20 hostages.

Local television named one as a security guard at the Dos Palmas island resort and said the other had not been identified.

``Both of them were headless,'' Basilan governor Wahab Akbar told Reuters. ``The bodies were decomposed.''

Officials suspect the two men were killed before the rebels swarmed into Lamitan early on Saturday. The guerrillas were holed up there for over 24 hours before shooting their way through a military cordon, dragging along with them the remainder of the Dos Palmas hostages and several other captives, including nurses.

``They covered their escape with a heavy volume of fire and then used children and other hostages as human shields,'' Brigadier-General Edilberto Adan told reporters in Manila.

``Our troops withheld their fire ...(even if) they saw rebels moving because some of the hostages might be hit,'' Adan said, explaining how they were able to get through the military cordon.

The military said at least 16 soldiers have been killed since fighting began in the hills outside Lamitan on Friday. Several civilians and rebels have also died, but there were no confirmed numbers.

One army captain was killed in the rebels' escape near the hospital compound, when a rocket fired from a rebel launcher blasted his armored car.

ARROYO TAKES TOUGH LINE

President Gloria Macapagal Arroyo (news - web sites), who has taken a tough line on the kidnappings, vowed there would be no let-up in the military operation and repeated that no ransoms would be paid.

``We will negotiate only for the unconditional release of the hostages... The purpose is to convince them (the rebels) that this is the best thing they can do because the alternative for them is worse,'' she told Manila radio dzRH.

The sight of a hospital building and a church with glass windows shattered and walls peppered with bullets greeted armed forces chief General Diomedio Villanueva when he visited Lamitan after the rebels had left.

Roads outside the compound were pockmarked with craters, caused either by rockets fired by air force helicopters or by the rebels.

The bodies of two soldiers and an altar boy lay near the church.

Residents said they saw the guerrillas slipping out of the hospital compound after they had set fire to four nearby houses to divert military attention. A power outage had plunged the town into darkness.

``We were separated from the other hostages when the rebels were making their getaway,'' Janice Go, one of the five who escaped, told RMN radio. ``They took the Americans with them.''

PLEAS FROM HOSTAGES

Another escapee, Teresa Ganzon, appealed to the military to stop firing while the rebels were still holding hostages.

Arroyo, an admirer of Britain's ``Iron Lady'' Margaret Thatcher, dismisses the rebels as a bandit gang and has vowed to crush them, offering them a choice between death and surrender.

The Abu Sayyaf is one of two groups fighting for an Islamic state in the south of the mainly Roman Catholic country but its main pursuit appears to be kidnap for ransom.

Adan said six soldiers were killed in fighting around the hospital, raising military casualties in the rescue operation to 16 dead with more than 35 wounded.

``We have had no sightings of the Americans so far,'' he said.

Some of the hostages taken from the hospital included nurses, staff and ``some patients,'' Adan said.

The three Americans, who were among the 20 tourists and resort workers taken from an island resort near Palawan. They include a missionary couple and a tourist.

Two priests caught inside the church during the rebel attack escaped. ``I was able to run away... I leapt over the wall and hid,'' Father Cirilo Nacorda said.

``The ideology of a paradise is difficult to fight,'' Akbar said, commenting on the rebels' escape. The governor was referring to a rebel belief that to die for Islam brings a place in paradise.
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PHOTO CAPTION

Filipino soldiers carry their wounded colleague during a gun battle with Abu Sayyaf Muslim rebels in Lamitan town in the southern Philippines June 2, 2001. The Muslim rebels, trying to shake off pursuing Philippine soldiers, took over a church and a hospital in Lamitan on Saturday and said they held 200 hostages, including doctors, patients and a priest. (Erik De Castro/Reuters)
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