Military chief of staff Gen. Eduardo Ano said at least one police officer was killed and eight soldiers were wounded in the fighting, which broke out in the predominantly Muslim city of Marawi when troops attacked a hideout for Muslim militant leader Isnilon Hapilon.
Some militants were also killed or wounded, officials said.
Hapilon reportedly has been chosen to lead an Islamic State group branch in Southeast Asia and is on the US.
An Arabic-speaking Islamic preacher known for his expertise in commando assaults, he pledged allegiance to the IS group in 2014, according to security officials.
Ano said Hapilon, who is still recovering from wounds sustained in an airstrike by the air force in January, and more than a dozen of his men summoned reinforcements from their allies in the Maute militant group, which deployed more fighters into Marawi. Ano said nearly 50 gunmen in all managed to enter the bustling commercial city of more than 200,000 people.
Troops sealed off major entry and exit points to prevent Hapilon from escaping, Ano told The Associated Press by telephone from Moscow, where he was accompanying President Rodrigo Duterte on a visit.
"They did some burnings, they showed up in another area so it looked chaotic, but it's actually a small group facing an overwhelming number of government forces," Ano said.
The Maute group is one of less than a dozen new armed Muslim groups that have pledged allegiance to the Islamic State group and formed a loose alliance in the southern Philippines in recent years. Hapilon was reportedly designated the leader of the alliance.
The Maute has been blamed for a bomb attack that killed 15 people in southern Davao city, Duterte's hometown, last September and a number of attacks on government forces in Lanao, although it has faced setbacks from a series of military offensives.
While pursuing peace talks with two large Muslim rebel groups in the south of the predominantly Roman Catholic nation, President Duterte has ordered the military to destroy smaller extremist groups which have tried to align with the Islamic State group.
He has said he could place the south, the scene of decadeslong Muslim uprisings, under martial law if terrorism spirals out of control.
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