Philippine President Rodrigo Duterte on Saturday ruled out the possibility of allowing Islamic State-linked militants to flee a southern city in exchange for the release of dozens of hostages.

The militants seized large parts of Marawi City on the island of Mindanao in May, and a hardcore of fighters has held out through more than 100 days of air strikes and ground attacks by troops.

"No way," Duterte told reporters when asked about a rumour that one rebel leader, Omarkhayam Maute, had proposed releasing hostages in exchange for the safe exit of the militants.

Pockets of fighters remain in the ruins of the heart of a city devastated by artillery and bombings, in an occupation that has alarmed the region about the possibility of Islamic State, on the back foot in Iraq and Syria, making a new home in the southern Philippines.

The military has launched its final push to retake Marawi, and is coming under heavy fire from gunmen as troops try to secure buildings and navigate through mines and booby-traps.

The military estimates about 20 to 30 hostages are being held, some of whom it says were forced to take up arms against government troops.

"If I can save one life there, I am willing to wait one year (to retake the city)" Duterte said of the hostages, after visiting wounded soldiers in Cagayan de Oro, a few hours away from Marawi.

Martial law has been imposed in Mindanao, an island of 22 million people, until the end of the year, to allow the military to break up an alliance of pro-Islamic State militant groups.

On another front, the military is also fighting communist rebels of the New People's Army following a breakdown in peace talks with the government. Duterte on Saturday threatened to expand martial law to other areas of the Philippines to crack down on the insurgents.

Some 655 militants, 45 civilians and 145 soldiers and policemen have been killed in Marawi, according to the military, which says it has rescued 1,728 civilians. At least 400,000 have been displaced.

Army spokesman Colonal Edgard Arevalo said saving hostages was the priority of the military's mission.

"We are still very mindful of the presence of civilians -guns against their heads - who were made human shields or ordered to wield firearms and ammunition, were converted to become fighters and shoot at our troops," he said in a statement.

The United States has provided technical support to the Philippines military in Marawi. Visiting Manila on Friday, Australian Defence Minister Marise Payne offered a small detachment of soldiers to provide training to Philippine forces.