Police defused a bomb near the US embassy in the Philippine capital Monday, with militants who had declared allegiance to the Daish group likely behind the attempted terrorist attack, authorities said.

A taxi passenger dropped the mortar bomb with a mobile phone detonator in a rubbish bin about 200 metres (650 feet) from the embassy along one of Manila's busiest roads, but a street sweeper found it and alerted authorities, police said.

"This is an attempted act of terrorism," national police chief Ronald dela Rosa told reporters, adding he believed the Maute militant group currently facing a military offensive in the southern Philippines was the prime suspect.

"Because of an ongoing police/military operation there, (the militants) have many casualties. We can theorise that this is a diversion to loosen our operations."

Police said they detonated the bomb just over an hour after it was discovered.

The Maute gang was also blamed for a bombing in President Rodrigo Duterte's home town in the southern city of Davao in September that killed 15 people.

The military has since Thursday been battling dozens of Maute gang members holed up in an abandoned government building in the mainly Muslim rural town of Butig on Mindanao island, about 800 kilometres (500 miles) south of Manila.

Thirteen soldiers have been injured in the fighting, military spokesman Brigadier General Restituto Padilla told reporters.

He said 19 militants had been killed, although none of those bodies had been recovered and the death toll could not be verified. Fighting continued on Monday.

Padilla supported the police theory of who was behind Monday's attempted bombing.

"It is possible that these groups are doing this to help their fellow terrorists and divert (government) attention," Padilla said.

Muslim groups have waged a decades-long armed independence struggle in the south of the mainly Catholic Philippines that is believed to have claimed more than 120,000 lives.

The main rebel groups are in peace talks with the government.

- Rising threat -

But the Maute gang is one of several to have declared allegiance to Daish and continued fighting.

The Abu Sayyaf, infamous for kidnappings for ransoms, is another.

Leaders of the main rebel organisations have repeatedly warned that the failure of previous peace efforts, including with Duterte's predecessor, could lead to disaffected youth joining more extreme groups such as the Maute gang.

The Jakarta-based Institute for Policy Analysis of Conflict also said last month that deepening cooperation among the Maute gang, the Abu Sayyaf and other pro-IS groups meant more deadly violence was "a matter of when, not if".

The Philippine military has staged a series of deadly battles against the Maute gang in its mountainous and remote strongholds around Butig in recent months.

Eight Maute gang members were captured in August, but fellow militants easily broke them out of a local jail.

The Davao bombing prompted Duterte to put the nation under a "state of emergency" which allowed the military to do law enforcement with police.

His office said security measures would be increased further after the attempted bombing at the US embassy, particularly at airports, seaports and other transport terminals.

Most of the militant-related violence has been limited to the southern Philippines, and foreign governments warn their citizens against travelling there because of the threat of kidnapping or being caught up in conflicts.

However militants have also staged attacks in Manila, a megacity of more than 12 million people.

The Abu Sayyaf was blamed for the bombing a ferry in Manila Bay in 2004 that killed 116 people, in the nation's deadliest terrorist attack.