The Philippines Star reported the government's Crisis Management Committee confirmed the release of Senior Superintendent Jose Chiquito Malayo.
Interior Secretary Manuel Roxas II also confirmed Malayo's release and said some MNLF members had surrendered.
"[We're] happy to inform that Senior Superintendent Chiquito Malayo has successfully convinced 23 MNLF fighters to come into the fold of the law," Roxas said.
Police had reported earlier Malayo was making arrangements with MNLF fighters for the release of civilian hostages when the fighters took him hostage at gunpoint.
The rebels, believed to be part of the Nur Misuari-led faction of the MNLF, had taken dozens of local people hostage before freeing more than 100 of them Tuesday during a deadly standoff, Sunstar.com.ph reported.
Police said earlier despite Malayo's abduction, military operations in the two-week standoff with the MNLF would continue, GMA News reported.
Fighting, including helicopter attacks by police, continues despite a cease-fire between the military and MNLF announced during the weekend.
The BBC reported Tuesday soldiers had taken about 70 percent of rebel-held areas surrounding Zamboanga City, but about 100 people, mostly rebels, had been killed.
After heavy fighting Monday, it appears the worst clashes are over, the BBC said.
Despite the apparent government victory on the battlefield, it remains to be seen who will win the political war over the future of Mindanao.
Zamboanga is at the heart of one of the country's most restive regions where a plethora of Muslim groups have been fighting for degrees of independence from the federal government in Manila for decades. Estimates vary, but around 120,000 people are believed to have died in the conflict.
An agreement was reached with the MNLF in 1996 that created the Autonomous Region in Muslim Mindanao. But infighting between rebel groups and clashes with authorities have continued.
Hope for peace was rekindled during the national election in 2010. One of Philippine President Benigno Aquino's main platforms was a promise to work with rebel groups to stop the fighting.
To this end, during breakthrough talks in October last year government representatives and members of the Moro Islamic Liberation Front hammered out an agreement to set up a new area in the region.
The area, yet to be created, would cover about the same area as the Autonomous Region in Muslim Mindanao, which Aquino said after announcing the agreement was a "failed experiment."
An elected government to administer the new region -- whose "Basic Law" will be based on Islamic Sharia law -- should be in place sometime in 2016, the detailed framework agreement available on the presidential website stated at the time.
Aquino said it "paves the way for a final and enduring peace in Mindanao" under a new name for the area, Bangsamoro.
"This agreement creates a new political entity," he said. "It deserves a name that symbolizes and honors the struggles of our forebears in Mindanao and celebrates the history and character of that part of our nation."
The Manila government's powers are to include defense, foreign policy, coinage and citizenship.
A Bangsamoro government would have tax-raising powers, more say over foreign investment and, importantly for the MILF rebels, much more authority over natural resource development.
The Wall Street Journal, in a report just after the 2011 peace agreement was announced, noted Aquino's first term as president expires in 2016 -- the same year as Bangsamoro is scheduled to be created.
He has been acting as if he already on the campaign trail, The Wall Street Journal said.
The MILF came into existence in 1981 when a group split from the Moro National Liberation Front.
The MNLF, which wasn't part of last year's peace talks and agreement, could be angry at being sidelined, the BBC reported this week.
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