Dozens of residents were evacuated from the scene in Zamboanga Citys San Roque village, near an airport and the militarys Southern Command headquarters, the officials said.
A police contingent approached the residential compound earlier but was met with volleys of gunfire that wounded two policemen, officials said.
Marines and Army troops, backed by an armored personnel carrier and helicopter gunships, arrived and surrounded the area.
The Abu Sayyaf hurled grenades at the soldiers while the military used heavy 90-mm. machineguns to batter down the tall concrete walls of the compound, witnesses recounted.
Two soldiers were wounded in the on-and-off exchange of fire, officials said.
One of the suspected Abu Sayyaf guerrillas, his gun blazing, jumped over a fence in an attempt to escape but was shot dead, said Col. Alexander Yapching, commander of the militarys Task Force Zamboanga. Another rebel was captured, officials said.
The Abu Sayyaf fighters set fire to parts of the compound to force the soldiers back. "Well wait for them to come out," Yapching said as the two-story house caught fire and explosions reverberated inside.
Government troops closed in and prepared to scour the compound and nearby areas, journalists said. The charred remains of a gunman were found in the ruins afterwards.
However, the gunmen believed hiding in the compound were not found, officers of the raiding team said.
Manila radio station dzMM said there were reports that children were inside the house with the rebels, but regional military spokesman Lt. Col. Daniel Lucero said he could not confirm this.
The clash was the latest violence in Zamboanga, a bustling, predominantly Christian port city of about 500,000 people where Abu Sayyaf guerrillas have been blamed for a series of deadly bomb attacks.
A bomb last October killed three people, including a US Green Beret, outside the main gate of the military camp in Zamboangas Malagutay village.
The Abu Sayyaf, notorious for kidnappings and killings, has been linked to Osama bin Ladens al-Qaeda network and is on the US list of foreign terrorist organizations.
A six-month US-Philippine counterterrorism exercise on nearby Basilan island last year has been credited with breaking up the extremist group and killing and capturing some leaders and members.
US and Philippine defense officials are discussing a new round of exercises designed to wipe out remnants of the group, including senior leader Khaddafy Janjalani, who are believed to have fled farther south to Sulu. With AFP