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Malaysian security forces launched an assault on Tuesday to clear out armed Filipino intruders engaged in a three-week incursion that has left 27 people dead.
Prime Minister Najib Razak said in a statement run by national news agency Bernama that negotiations with the Filipino militants, believed to number 100-300 and holed up in a farming village, had failed.
"At 7:00 am this morning, security forces launched an attack on Tanduo village," Najib said.
A total of 27 people have been reported killed since the militants landed on February 12 in the state of Sabah on Borneo island by boat and claimed the state on behalf of the heir to a now-defunct Philippine Islamic sultanate.
It has been Malaysia's worst security crisis in years, underlining instability and lawlessness in the seas between the two countries and exposing lax Malaysian security along its coast.
"The longer this invasion lasts, it is clear to the authorities that the invaders do not intend to leave Sabah," Najib said.
"The government must take action to safeguard the dignity and sovereignty of the country as required by the people."
Violence first erupted on Friday when a shootout between security forces and the militants left 12 Filippinos and two police officers dead.
Another gunbattle Saturday in the town of Semporna, hours away from Tanduo by road, left six police and six gunmen dead, raising fears of a wider guerrilla infiltration.
Another gunman was beaten to death there Saturday by villagers, police have said.
Local media reported fighter jets screaming over the stand-off site and explosions were heard. Military trucks were also seen moving into the area, which is surrounded by palm oil estates.
Najib had ordered a doubling of security forces in the area after the weekend violence.
Followers of the 74-year-old Manila-based Islamic leader, Jamalul Kiram III, say the gunmen are ready to die to defend his claim to Sabah. The exact identities of the gunmen and their numbers remain a mystery.
Supporters of the Filipino intruders took their campaign to cyberspace on Monday, manipulating Google listings to post a message backing the incursion.
A number of Philippine sites also were reportedly defaced by pro-Malaysia hackers.
Sabah has seen previous smaller cross-border raids from Islamic militants and other bandits from the Philippines, but nothing on the current scale.
The Sulu sultanate's power faded about a century ago but it has continued to receive nominal Malaysian payments for Sabah under a lease deal inherited from European colonial powers.