Police said the rebels freed 19 of their captives and promised to release the remaining hostage in exchange for an M-16 rifle.
Superintendent Chino Mamburam, Midsayap police chief, said the 19 freed hostages claimed they were abducted by MILF rebels.
The remaining hostage, a Maguindanao fisherman, is being held at gunpoint somewhere in Barangay Kadigasan, the scene of recent clashes between the MILF and government troops.
Sources from the Midsayap municipal peace and order council said the rebel group is led by a certain Commander Samal Masgal, a notorious MILF commander wanted for murder and armed robbery.
Mamburam said the rebels demanded from the family of the remaining captive an M-16 rifle as ransom.
"They want a M-16 Armalite rifle in exchange for the victim’s liberty," Mamburam said.
Security forces have given the MILF 72 hours to release the hostage or risk facing a police assault, he added.
The rebels reportedly snatched the 20 fishermen in Barangay Mudseng and subsequently brought them to Barangay Kadigasan, some 10 kilometers southeast of Midsayap.
Heavy clashes near Midsayap last week left 17 rebels and a soldier dead.
President Arroyo then ordered a halt in military offensives in a bid to salvage the peace talks with the MILF.
It was not immediately clear how the hostage-taking would affect the peace process. The MILF could not be reached for comment.
The 12,000-strong MILF, which has been fighting for nearly four decades, signed a ceasefire agreement with Manila in 2003, paving the way for peace talks.
But negotiations stalled last year when the MILF demanded economic control of ancestral lands. -with AFP