President Rodrigo Duterte responded to the crisis by declaring martial law in the south and cutting short his diplomatic trip to Russia. The 175,000-strong Philippine National Police has also been put on full alert.
"I may declare martial law throughout the country to protect the people," Duterte told reporters as he returned from Russia on Wednesday.
Thousands of people fled the violence in the 200,000-strong city of Marawi on Wednesday, as Duterte pledged a "harsh" response against Islamist extremists rampaging in the city.
The militants beheaded a local police chief, Duterte said, adding that the country was "in a state of emergency" over riots in the south.
"The chief of police in Malabang on his way home, going back he was stopped by a checkpoint manned by terrorists and I think they decapitated him right then and there," the president said.
In a separate incident, Islamist gunmen took more than a dozen people from a cathedral in Marawi, including Catholic priest Chito Suganob, police and Catholic Church officials said.
The gunmen are believed to be members of the local Islamist group Maute, which has professed allegiance to the so-called "Islamic State" (IS) militia.
"They have threatened to kill the hostages if the government forces unleashed against them are not recalled," the Philippines' most senior archbishop, Socrates Villegas, said in a statement.
Clashes began after terror search
Clashes in Muslim-dominated Marawi started on Tuesday, when security forces raided a house in search of an infamous terrorist and the leader of the Abu Sayyaf militia, Isnilon Hapilon. Security analysts believe that the Islamist leader aims to unite jihadist factions in the Philippines, including the Maute militia.
Over 100 militants responded to the raid by starting fires and riots, Filipino authorities said. Local media reported that militants seized a hospital, while social media users posted images of masked gunmen setting fire to the municipal jail and a school.
Church appeals to militants
The Catholic Church urged the jihadists to release the hostages "in the name of a Merciful and Benevolent God - the very same God we Christians worship and adore."
"At the time of his capture, Fr. Chito was in the performance of his ministry as a priest. He was not a combatant. He was not bearing arms. He was a threat to none," Archbishop Villegas said in a statement.
"His capture and that of his companions violates every norm of civilized conflict."
dj/jm (AFP, dpa, AP)