Philippine army says Muslims rebels fleeing southern city

By Erik de Castro ZAMBOANGA CITY, Philippines (Reuters) - Philippine forces freed scores of civilian hostages on Tuesday as fighting subsided in a port city where hundreds of rogue Muslim guerrillas have been battling for more than a week.

The fighting, in which nearly 100 people have been killed, has highlighted lingering grievances in the Catholic-majority country despite its growing economy and an agreement with the biggest Muslim rebel group that was meant to bring peace.

The guerrillas who stormed into the city of Zamboanga on Monday last week belong to a breakaway faction of the Moro National Liberation Front (MNLF).

They object to a deal aimed at ending 40 years of conflict signed last October with the main Muslim rebel group, the Moro Islamic Liberation Front (MILF), and are trying to derail it.

An army spokesman said on Tuesday the guerrillas were fleeing from Zamboanga and heading to outlying islands, off the main southern island of Mindanao.

While the army had freed about 200 hostages since late on Monday, the fleeing rebels had taken captive a team of police officers, including the Zamboanga City police chief, police said.

Armed forces spokesman Lieutenant-Colonel Ramon Zagala told reporters the army had killed 34 rebels in the past 24 hours

"Our forces continue to press on and push them out of the city ... We will finish this problem at the soonest possible time," Zagala said, while sounding a note of caution: "The fighting is not over yet."

A Reuters witness saw some of the rescued hostages with bruises and other minor injuries as they boarded army trucks and were taken away. Some elderly women wept. All of them looked exhausted.

NO IMPACT ON FINANCIAL MARKETS

About 80,000 people have been displaced in the nine days of fighting. Hundreds of homes, and several public and commercial buildings have been destroyed. Flights and ferry services are suspended.

The clashes could tarnish the image of the Philippines as a destination for foreign investment but financial dealers said on Tuesday the violence has not had an impact on markets.

The peso was stable to slightly weaker while and Manila stocks were up 0.4 percent by the early afternoon.

Mindanao has reserves of gold, copper, nickel, iron, chromite and manganese, which account for about two-fifths of total reserves in the country.

But Zamboanga is far from most mining operations, at the end of a peninsula in the southwest of Mindanao, which is about the same size as South Korea.

The fighting has, however, brought the largely Christian city of Zamboanga to a halt.

Six canneries that accounts for 80-85 percent of the country's sardines production are shut operations and shipment of about 10,000 tonnes of dried seaweed used in the production of carrageenan, a food additive, have been halted.

"If the conflict is prolonged, raw material supplies to local processors and export markets would be disrupted that could result in increased prices," Maximo Ricohermoso, chairman of the Seaweeds Industry Association of the Philippines.

The Philippines is the world's second largest producer of carrageenan, exporting more than 100,000 tonnes a year valued at $250 million. (Additional reporting By Manuel Mogato and Erik dela Cruz in MANILA; Editing by Robert Birsel)

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