Military spokesman Lt. Col. Daniel Lucero said Moro Islamic Liberation Front rebels were holding three men hostage Monday after the military rescued 12 others following the attack on the town of Siocon.
The rebels were holding the hostages "evidently to be used as human shields," said Lt. Gen. Rodolfo Garcia, the military's vice chief of staff.
Government troops on Sunday regained control of Siocon, a predominantly Christian town on Mindanao island, after an attack by the separatist rebels.
Lucero said nine soldiers and police and 10 civilians were killed as army troops backed by helicopter gunships fought off about 100 rebels. He said six rebels were killed.
In a speech, President Gloria Macapagal Arroyo warned rebel leaders they would be held responsible for the attack.
"The attack on a civilian community is an act of terrorism," she said.
Arroyo called on the rebels to turn over the perpetrators, adding that she has instructed government negotiators to raise the issue with leadership and demand that it renounce terrorism when the two sides meet Wednesday in Malaysia to try to restart peace talks.
Rebel spokesman Eid Kabalu said the attack was directed at an army battalion headquarters as part of the guerrillas' "active defense posture" in the face of a continuing military offensive.
"We are trying to avoid these collateral damages, but it's difficult to avoid because the civilians are mixed with the military in the same area," Kabalu said.
He vowed the rebels would keep attacking unless officials meet their demands, including the return of a captured rebel camp and withdrawal of criminal charges against rebel leaders.
Presidential spokesman Ignacio Bunye dismissed Kabalu's claim, saying "burning the public market is not part of defensive posturing, and we can see the high number of civilian casualties."
Siocon Mayor Cesar Soriano said his town of 50,000 people was struggling to recover from the attack.
"If you can see the faces of our people here, even in the streets they are crying and you cannot help but feel very sad," he said in a radio interview.
In another incident, also on Sunday, the separatists ambushed three military trucks carrying soldiers' wives and children in Matanog town, 528 miles southeast of Manila, officials said.
Two soldiers and another soldier's wife were wounded while three guerrillas were killed, the army's 6th Infantry Division chief Maj. Gen. Generoso Senga said.