ZAMBOANGA CITY, Philippines, Sept 15 - A week of violence in the southern Philippines has undercut hopes of lasting peace in the resource-rich region and exposed the government to criticism for underestimating rogue Muslim rebels who feel ignored by a landmark deal last year.
The agreement signed by President Benigno Aquino and the biggest Muslim rebel group last October was meant to pave the way for a revival of southernmost Mindanao island after 40 years of conflict, giving Muslims there more autonomy in the Catholic-majority country.
That deal, with the Moro Islamic Liberation Front (MILF), remains on track, but the assault on the commercial hub of Zamboanga City by hundreds of armed rebels has underlined fears that the region's volatile mix of guns, clans and disgruntled rebel factions could yet derail the process.
The army said 61 people, including 51 members of the breakaway faction of the Moro National Liberation Front (MNLF), had been killed in the fighting, now in its seventh day. Ninety people have been wounded.
Aquino, who visited the city on Friday to face one of the biggest security crises of his three-year rule, must decide whether to crack down on the group - risking spreading violence - or open talks that could complicate the peace process.
A brief ceasefire collapsed on Saturday and troops were still battling rebels in Zamboanga, a port that is home to 800,000 people, and the nearby island of Basilan on Sunday, forcing thousands to flee.
The violence has paralyzed the port, shutting banks and businesses, setting around 300 houses on fire and grounding flights. The rebels made their surprise attack on Monday, trying to march through the city to plant a flag of independence.
"There's only one word to describe what is happening in the city - catastrophic," said Cholo Soliven, president of the Zamboanga City Chamber of Commerce and Industry. "We are losing a lot, our economy is bleeding."
SOBERING REMINDER FOR INVESTORS
Mindanao's mineral reserves include gold, copper, nickel, iron, chromite and manganese and account for about two-fifths of total reserves in the country.
The Sulu Sea and Cotabato Basin service area, both within the conflict zone, have combined reserves of 411 million barrels of crude oil, equivalent to more than three times the country's annual consumption, and 2.3 billion cubic feet of gas.
The violence is a sobering reminder for potential investors. Miners and other companies such as food processor Del Monte Pacific Limited had said they were considering expanding after the MILF peace deal.
"If the violence ... continues for a protracted period, or if the conflict widens, this could also seriously undermine Mindanao's efforts to attract new investment," said Rajiv Biswas, Asia-Pacific Chief Economist with IHS.
Complicating the standoff, the army says that at least 100 residents are trapped in rebel-held areas, with dozens believed to have been taken as hostages. About 62,000 people have been displaced, authorities said, while some residents stranded by the fighting appealed for food and water.
"We have no food and no money to buy it," Roland Bocoy, 33, a porter at the city airport, told Reuters. "I lost my home and the only possessions I have are the clothes on my back."
The rebels are one faction of the divided MNLF rebel group, which signed a discredited peace deal with the government in 1996. The faction's leader, Nur Misuari, 71, broke away from the main group in 2001 and warned last year that the MILF was signing its "death warrant" by agreeing to the latest deal.
"His intention is to provoke violence and internationalize this to make the MNLF a more important player in the peace process," said Stephen Norris, a security analyst with the Control Risks group in Singapore.
Rodolfo Garcia, a retired general, said the government should open talks with Misuari, who has kept a low profile since the violence started and has not acknowledged any role in it. Business leader Soliven said the government had committed a blunder by ignoring the MNLF founder.
"Misuari may no longer be powerful, but he is still the icon of Muslim struggle," Soliven told Reuters.
But Teresita Quintos-Deles, presidential adviser on the peace process, said that three MNLF factions had been due to attend a planned meeting with the government hosted by Indonesia on Monday - and that Misuari's faction had pulled out.
($1 = 44 pesos)
(Additional reporting by Manuel Mogato in Manila; Writing by Stuart Grudgings; Editing by Nick Macfie)