Military police killed one of Brazil's most wanted men after his gang spectacularly blasted its way into a gem-cutting plant Sunday, traded fire with police and made off with nine hostages.

"We have not had contact with the criminals to negotiate the hostages' release. And we also do not know exactly where they are," Rio Grande do Sul state military chief Sergio Abreu told reporters.

Three of the assailants died in the assault in the state of Rio Grande do Sul, a military police official told AFP on condition of anonymity.

Attackers fled with their hostages into a wooded area of the town of Cotipora, with police in cars and helicopters in pursuit, the official said.

The area where the strike was carried out is in the heart of Brazil's gem-cutting industry. It is a world leader in exporting many semiprecious stones such as topaz, aquamarine and amethyst.

The robbers detonated dynamite to storm into the plant, then ran into police on their way out, the military police official said.

"There was an intense firefight. Three assailants died and two police were injured," the official said.

Police have recovered part of the loot, but gave no figure for its value.

As they made their escape, the attackers split into two groups. One took two people who were in a bar hostage, and the other broke into a home and abducted seven people, apparently all members of the same family.

The forest where the gang fled is thick and hard to navigate, but police have it surrounded, said Altair de Freitas, deputy commander of the military in Rio Grande do Sul.

Governor Tarso Genro stressed that the hostages' lives were the top priority. "We are going to trust in our military police brigade for everything to turn out well," he told Radio Gaucha.

Helicopters and special operations teams with sniffer dogs were taking part in the search, he added.

News reports said the gang was made up of nine men armed with rifles.

The dead included Elisandro Falcao, 31, one of the state's most wanted men. He led a gang that specializes in robberies using explosives to target banks and automated teller machines, reports said.