UPDATE 4-Malaysian troops attack armed Philippine group in Sabah
* Jets bomb area, hundreds of troops involved
* Outcome of operation is unclear
* At least 27 killed in standoff
* Sparks political crises for Malaysia and Philippines
* Violence disrupts palm oil industry (Adds details on operation, U.S. embassy travel warning)
By Al-Zaquan Amer Hamzah
KUALA LUMPUR, March 5 (Reuters) - Malaysian troops backed by fighter jets stormed the camp of an armed Filipino group on Tuesday, trying to end a standoff on Borneo island after violence that killed at least 27 people and sparked fears of broader insecurity in the resource-rich region.
Jets bombed the area in Malaysia's eastern Sabah state for more than 30 minutes before hundreds of ground troops moved in to search for about 200 Filipinos believed to be hiding near a coastal palm-oil plantation, Malaysian officials said.
The outcome of the operation remained unclear more than 11 hours after it began. Malaysian officials said their forces suffered no casualties but they gave no details on the fate of the Filipinos, whose allies based in Manila claimed they had survived and were still resisting.
The government-run New Straits Times newspaper reported explosions at a site 30 km (19 miles) away from the main standoff.
After telling reporters earlier the operation had been successful, police said it was still going on and that gunmen could still be at large.
"The government has to take the right action in order to preserve the pride and sovereignty of this country," Malaysian Prime Minister Najib Razak said in a statement announcing the assault.
The group is demanding recognition and an increased payment from Malaysia for their claim as the rightful owners of Sabah, part of Borneo island and which the sultanate leased to British colonialists in the 19th century.
Malaysia has refused the demands and Manila has repeatedly told the group to put down its weapons and come home. But the violence has sparked a political crisis ahead of elections in both countries. Each government says it is investigating allegations of opposition involvement.
Najib, who faces a tough election within weeks, has come under pressure to take a firm stance against the group, which arrived by boat about three weeks ago claiming to be descendants of the southern Philippines' sultanate of Sulu.
The security headache could prompt him to delay the polls, which must be held by June, adding to nervousness among investors over what could be the country's closest ever election.
Philippine President Benigno Aquino has said he suspected his country's opposition backed the obscure group in an attempt to undermine him ahead of congressional elections in May.
The insecurity has disrupted operations in Sabah's huge palm oil industry. Prolonged trouble could dampen growing investor interest in energy and infrastructure projects in the state, although the main oil fields are far from the standoff.
Oil majors such as ConocoPhillips and Shell have poured in billions of dollars to develop oil and gas fields in Sabah. Chinese companies have been investing in hydro-power and coal mining.
The violence, which is occurring close to popular diving spots, could also hit tourism. The U.S. embassy in Malaysia issued a statement on Tuesday advising against travel to the affected area.
Two policemen were killed along with 12 militants when Malaysian security forces tried to tighten a cordon around the group on Friday. That sparked more violence over the weekend.
AQUINO BLAMES "CONSPIRACY"
Aquino has come under pressure from opponents for supporting Malaysia's rejection of the group's claim to Sabah, which remains a dormant Philippine policy goal.
He in turn has suggested the political opposition encouraged the intrusion as a way of undermining a historic peace deal signed with Muslim rebels last year, calling it a "conspiracy".
Sulu is a Philippine island chain that lies between Sabah and the Philippines' Mindanao island. The sultan's family, the Kirams, are traditional rulers, with no formal political powers.
"The family of Sultan Jamalul Kiram could not possibly have settled on this course of action alone," Aquino said on Monday.
"All those who have wronged our country will be held accountable."
The Philippines has asked for a Philippine navy vessel to be allowed to provide humanitarian, medical and consular assistance and to take the armed group home.
For Malaysia, the crisis is complicated by the illegal immigration of Filipinos to Sabah, whose population has more than quadrupled since the early 1970s. The Philippine government says about 800,000 Filipinos now live there.
Sabah residents have been transfixed in recent weeks by a public inquiry into allegations that illegal immigrants were handed identity cards by the ruling United Malays National Organisation (UMNO) in a citizenship-for-votes scheme.
Much of the population in the area affected by the violence has cultural and family links to the southern Philippines -- an hour away by speedboat -- raising doubts over their allegiance.
That could hinder efforts to capture the gunmen and make immigration an awkward issue for Najib. Voters in Sabah, traditionally a bastion for the UMNO-led National Front coalition, could swing the election to the opposition if it can build on recent gains there.
Three Malaysian palm oil refineries with a combined capacity of 1.8 million tonnes were running at reduced capacity and are preparing to halt operations if the violence drags on, refinery officials with direct knowledge of the matter told Reuters.
The refineries are owned by Singapore's Wilmar International and Malaysia's KL Kepong and Kwantas Corp . Sabah is Malaysia's top oil palm growing region, accounting for a quarter of national production.
Much of the palm oil from Sabah is shipped to China -- the world's second-largest consumer of edible oils. (Additional reporting by Niluksi Koswanage in Kuala Lumpur; Manuel Mogato and Rosemarie Francisco in Manila; Writing by Stuart Grudgings; Editing by Dean Yates and Neil Fullick)
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