At least 18 soldiers were killed and 53 more wounded in the nine-hour clash with the Abu Sayyaf guerillas, Philippine army representatives said on Sunday.
The group was "responsible for the series of kidnappings and atrocities" in the Muslim-dominated south of Philippines, regional military spokesman Filemon Tan said.
According to military sources cited by the AP news agency, Manilla deployed troops to capture or kill Abu Sayyaf commander Isnilon Hapilon, who has been hunted for years over various terror attacks.
The Islamist had publicly pledged alliance to the "Islamic State" group, with Washington offering $5 million (4.4 million euro) for information leading to his capture.
However, the rebels managed to quickly call in reinforcements after the army attack on Saturday, and inflict heavy loses on government troops. At least four of the soldiers were beheaded during the attack, according to spokesman Tan.
The army killed one of Hapilon's sons and four more jihadists, and wounded around 20 militiamen, Tan said.
The Saturday battle comes only a day after an Abu Sayyaf faction released an Italian ex-missionary, after keeping the retired priest in the jungle for six months.
According to unconfirmed reports, Abu Sayyaf militants are holding 18 more foreign hostages, including two Canadians and a Norwegian.
The group, founded in 1991, is known for kidnapping foreigners and demanding large ransom for their release.
dj/bw (AP, AFP)