Zamboanga City, Philippines - Two people were killed in a grenade attack on a southern Philippine island where fighting erupted between government troops and Muslim militants holding captive three international Red Cross staff, police said Tuesday.

Three people were also wounded in the explosion Monday evening inside a karaoke bar in the port area of Jolo town on Jolo island, 1,000 kilometres south of Manila, said Senior Superintendent Julasirim Kasim, the provincial police chief.

Kasim said the blast could have been a diversionary attack by Muslim Abu Sayyaf rebels, who clashed with marines earlier Monday in Indanan town as they attempted to break through a military cordon set up to prevent them from spiriting their hostages off the island.

The fighting wounded Abu Sayyaf commander Albader Parad and killed his deputy, police said.

The Abu Sayyaf rebels have been holding captive three employees of the International Committee of the Red Cross - Swiss Andreas Notter, Italian Eugenio Vagni and Filipino Mary Jean Lacaba - since January 15.

The three were abducted after they visited the provincial jail in Jolo town, where they were overseeing a water and sanitation project.

Kasim said the Abu Sayyaf earlier threatened to launch attacks and burn Jolo town if the military does not withdraw from Indanan.

But he added that police investigators were also looking into other motives for the grenade attack, including extortion or a personal grudge against the karaoke bar's owner.

Kasim said that according to intelligence reports, the Red Cross hostages were transferred to a different group of Abu Sayyaf rebels before Monday's fighting.

But a military source said the hostages were with the group of about 40 guerrillas who tried to move out of the area.

"The hostages were seen and were not harmed," the source said.

The International Committee of the Red Cross said it was "very concerned" about the fighting and the impact on the hostages' welfare.

"Their safety is paramount," said Alain Aeschlimann, the committee's head of operations of East Asia, South-East Asia and the Pacific. "We repeat our call that no action should be taken that could put the lives of Mary Jean, Eugenio and Andreas in danger."

The al-Qaeda-linked Abu Sayyaf has been blamed for some of the worst terrorist attacks and high-profile kidnappings in the Philippines.

In 2000, the Abu Sayyaf abducted 21 European tourists and Asian workers from a Malaysian resort island and brought them to Jolo. The hostages were freed months later after payments of millions of dollars in ransom.

The following year, a separate band of Abu Sayyaf rebels seized 17 Filipino vacationers and three US tourists from a western Philippine resort. Most of the hostages were later rescued or ransomed off, but two of the Americans were killed. (dpa)