A Filipino on the United States' list of most wanted "terrorists" has been killed in a firefight in the southern Philippines, Muslim rebel leaders and the military said Monday.

Abdul Basit Usman was killed in a remote mountainous area while being escorted by members of the Moro Islamic Liberation Front (MILF), the nation's biggest rebel group, its vice chairman Ghazali Jaafar said.

"We can confirm that Usman is dead and his body was buried in accordance with Muslim tradition," Jaafar told AFP, but he refused to say who killed him.

The MILF is seeking to finalise an accord, signed last year, with the government to end four decades of fighting in which about 120,000 people have died.

Security forces had been hunting Usman since he escaped from a January police raid that killed Malaysian Zulkifli bin Hir, an alleged bomb maker who was the subject of a $5-million US government bounty.

Usman, accused of repeated bomb attacks in the southern Philippines, was the subject of a $1-million US bounty.

The January raid, conducted in MILF territory, also led to the death of 44 police commandoes as rebels fought back, setting back efforts to finalise the peace deal.

The MILF has since then been under intense political pressure to show it is a reliable peace partner.

Jaafar said Usman was killed as MILF rebels were escorting him to the group's leaders to surrender, adding that he probably did not know he was being taken back to the MILF leaders.

"There was a firefight along the way. Usman could have sensed that he was being double-crossed," Jaafar said.

However he refused to give any more details as to who killed Usman, saying only that the circumstances of the firefight were under investigation.

Military chief General Gregorio Catapang said Usman had been killed, but that it remained unclear as to who killed him.

"Basit Usman is dead, as to the circumstances of what happened during that encounter, it's up to (the investigation)," Catapang told reporters.

The military said five of Usman's followers had also died in the battle, and that some of his own men may have double crossed him.

Security forces accuse of Usman of carrying out at least nine bombing incidents in the south, including an attack in the port city of General Santos in 2002 that killed 15 people and wounded 60 others.

The US State Department's website describes him as "a bomb-making expert with links to the Jemaah Islamiyah and Abu Sayyaf Group terrorist organisations" leading him to be considered a threat to American and Filipino citizens and interests.

As part of the peace pact, the MILF, which has about 10,000 fighters, agreed to give up its independence ambitions in exchange for an autonomous homeland.

The government and the MILF are racing to finalise the accord by the middle of next year, when President Benigno Aquino has to stand down.