Thousands of residents fled as fighting between Philippine troops and Muslim rebels intensified Wednesday on the third day of a deadly siege in a key southern city.

At least 13,000 people crammed into Zamboanga city sports stadium seeking safety as soldiers battled gunmen and snipers in nearby deserted neighbourhoods.

People began fleeing Monday when about 180 Moro National Liberation Front guerrillas seeking to derail peace talks poured into six of the port city's coastal neighbourhoods.

In the Santa Catalina neighbourhood Wednesday, Philippine marines traded fire with gunmen who appeared to be using 10 residents on a roadside as human shields, an AFP photographer said.

One of the residents was waving a white cloth tied to a pole.

In the same neighbourhood police arrested two male MNLF suspects, wounding one of them. Officers told AFP the men were carrying bags of rice which they had scattered on the floor to reveal two hidden pistols.

In the nearby community of Santa Barbara two suspected rebel snipers fell from the upper sections of a mosque after taking fire from an armoured troop carrier, another AFP reporter saw.

About three kilometres (two miles) away, an increasing number of people were taking refuge in the city sports stadium.

"We're trying our best to provide decent facilities for them," government social worker Beth Dy told AFP while adding that the venue only had four portable toilets and no bedding.

About 5,000 residents from the six communities under siege arrived overnight and some had no choice but to pitch makeshift tents on the grass, Dy said.

Social Welfare Secretary Corazon Soliman, who arrived in the city Wednesday to run the humanitarian operation, said the numbers at the stadium were growing.

The six communities under siege are home to 160,000 mainly Muslim residents.

Interior Secretary Mar Roxas said police and the military had the areas surrounded but ruled out a military assault, saying this could lead to heavy civilian casualties.

"We continue to look for ways to solve this problem peacefully," he told a news conference.

"We ask you to extend your patience further."

Officials said their efforts were made more difficult because the rebels were hiding among the civilian residents, and because they had failed so far to reach MNLF founder Nur Misuari.

Misuari had led the MNLF through a 25-year guerrilla war before signing a peace treaty with the government in 1996.

His faction later laid a similar deadly siege on Zamboanga in 2001 that led to his imprisonment until 2008, when all charges against him were dropped.

Misuari opposes a proposed government peace deal with rival rebel faction the Moro Islamic Liberation Front (MILF) aimed at ending the Muslim rebellion that had claimed 150,000 lives.

He has said that it would marginalise the MNLF and violate the terms of the 1996 peace deal.

The siege began four weeks after Misuari declared "independence" for the Muslim regions of the mainly Catholic nation and urged his followers to besiege government installations.

The military said the latest attack on Zamboanga is led by a top Misuari lieutenant, Habier Malik.

It has left 12 people dead and 36 wounded, according to the latest official tally.

The dead include eight rebels, two civilians, a police officer and a soldier. The wounded also included three policemen and 12 soldiers.

Zamboanga mayor Maria Isabelle Climaco Salazar told ABS-CBN television that efforts from local government negotiators to convince Malik to free residents and leave the city had failed.

"They have tried to really reach out, to listen to what their demands are, but they refused to listen to anybody locally," Salazar said.

Roxas said the gunmen were still using 80 "human shields", down from 180 a day earlier. Salazar said some had escaped or been let go.

Absalom Cerveza, a Misuari spokesman, told ABS-CBN the civilians "are not being used as shields" but fighters feared if they allowed them to leave the areas they could get caught in crossfire as they fled.

"We do not want to send them out for fear of their safety," he said.