Philippines President Gloria Macapagal-Arroyo acceded to the Abu Sayyaf demand to allow Malaysian negotiators to mediate in the hostage crisis in the first sign she had relented since the impasse began three weeks ago.

The government has said however that it would not grant the rebels' other demand to pull troops out of Basilan, where a massive manhunt has been launched for the hostages.

Arroyo blinked first with just minutes to spare after the Abu Sayyaf offered to serve up the head of a "white" hostage on the eve of the 103rd anniversary of the Philippines' declaration of independence against Spain.

The rebels lifted the threat after Arroyo agreed to ask the Malaysian government to allow two of its citizens, former senator Sairin Karno and businessman Yusuf Hamdan, to help Filipino negotiators mediate the release of the hostages.

Abu Sayyaf rebels however raided a plantation in Tairin, Lantawan soon after and took 15 people hostage, many of whom were children. The rebels are now holding 28 hostages. The new victims were picked out of 50 residents who were initially rounded up from a 250-hectare coconut plantation in Lantawan town, Basilan, southern Philippines.

Rebel spokesman Abu Sabaya seemed sceptical of Arroyo's decision to allow Malaysian negotiators mediate. "We are not yet beheading the American hostages. But we have set a new deadline. The government might be employing delaying tactics."

The Arroyo government rejected suggestions it had caved in to terrorist blackmail. "The lives of people are very important. We have said we will do everything to save the lives of the innocent. We cannot allow any ransom demand," presidential spokesman Rigoberto Tiglao said.

"We have no objections to the Malaysian mediators. It is a small price to pay to ensure the lives of the hostages and make sure nobody is beheaded."