"I am very sad over the incident because what we had wanted to prevent, which is bloodshed, had actually happened," Prime Minister Datuk Seri Najib Razak said.
Twelve Filipino gunmen and two Malaysian soldiers were killed, The Malaysian Insider reported.
Police said the gunmen opened fire on security forces, and police then returned fire, but rebel group representatives argue Malaysian authorities shot at them first.
About 180 Filipino rebels, including 30 gunmen, invaded the town Feb. 9 and refused to leave until Friday's shootout, the Insider reported.
The Malaysian Insider said police have put a 4 p.m. curfew in place in the town.