Abu Sayyaf rebels holding three Red Cross workers say they will behead one hostage today afternoon if the Philippine military does not cede control of an entire island, a government official said.

The rebels told negotiators a tactical retreat from parts of Jolo island in the south would not be enough to save the lives of the three International Committee of the Red Cross (ICRC) captives.

The militants seized ICRC staff Mary Jean Lacaba of the Philippines, Andreas Notter of Switzerland and Eugenio Vagni of Italy in mid-January while they were on a humanitarian mission.

Pope Benedict XVI later Monday urged the militants to free the workers, the Vatican said in a communique.

The pontiff "wants to raise his voice and urge that humanitarian sensibility and reason prevail over violence and intimidation," the statement said.

"The Holy Father... asks for their release and calls on the authorities to favour a peaceful outcome to the tragic situation," the communique said.

The rebels' new demand was relayed late Sunday, just hours after the military and police pulled back from a jungle area where they had cornered some 120 militants and their three hostages, Interior Secretary Ronaldo Puno said.

The pull-back left the rebels in control of five towns and 140 square kilometres of the island, the government said.

But, said Puno, Abu Sayyaf's council of leaders now wants all security forces to abandon existing bases, leaving the province's half a million residents "completely unprotected" from the rebels.

"They demanded new repositionings," Puno said, adding that the military camps have been in Jolo for decades.

He said the rebels had set a 2pm deadline today for the government to comply, or they would behead one hostage.

Impossible to meet demands

Puno said the Abu Sayyaf wants troops restricted in "one small corner" of the island, where they will be highly vulnerable and unable to protect civilians.

"Frankly, we are very disheartened by these new demands that clearly are impossible to meet," Puno told reporters. "We would like to appeal to the (gunmen) to be reasonable."

Puno conceded that it appeared that Abu Sayyaf was in control of the situation by toying with their fears.

While the government was prepared to be "humiliated" to keep the hostages safe, Puno said if the Abu Sayyaf harms hostages that would trigger heavy reprisals.

"We just happen to believe that they're serious and we don't want the hostages to be harmed, but if they harm one hostage, then the situation will obviously change," he said.

Jolo governor and head of a crisis committee, Abdusakur Tan, earlier Monday said they were no longer prepared to give any other concessions.

"We have done everything we could. I don't know whether we could still give any other concessions, short of giving them the entire island," Tan said.

Later in the day, Tan said he spoke to the kidnappers and reported that "they appreciate the pullout of our troops who are close to their position (but)... what they want is a total pullout."

Vice-governor Anne Sahidula, another government negotiator, said that it was unlikely the kidnappers would extend their deadline.

Asked if she believed they would carry out their threat, she said "from what I have seen, they are used to doing this. It is like human life means nothing to them."

The Al-Qaeda-linked Abu Sayyaf is blamed for some of the Philippines' worst attacks. It has not demanded money for the ICRC hostages, although previous abductions led to millions of dollars in ransom payments.

-AFP