At least 26 other soldiers were wounded in the clash in Sulu province's mountainous Talipao town, army Col. Allan Arrojado said.
The fighting eased by nightfall and government forces were pursuing about 300 militants, who split into smaller groups and withdrew, he was quoted by AP as saying.
In a text message, Arrojado described the clash as "a major encounter," and said, "We are tracking their whereabouts."
A military officer involved in Friday's fighting said another soldier was missing and the wounded troops were to be airlifted to a military hospital. He spoke on condition of anonymity because he was not authorized to talk to reporters about the ongoing operation.
The militants were reportedly under Radulan Sahiron, a one-armed Abu Sayyaf commander long wanted by US and Philippine governments for his alleged involvement in many terrorist attacks and kidnappings. It was not immediately clear if the militant, now in his 70s, was himself involved in the fighting.
President Benigno Aquino III has ordered the military to crack down on the militants after they freed two German tourists on Oct. 17 reportedly after a huge ransom payment. It led to concerns that the money could be used by the resilient Abu Sayyaf to acquire more weapons.
The militants are holding several other hostages in Sulu's dense jungles, including two European birdwatchers, who were seized more than two years ago, and a Malaysian police officer, who was recently abducted in Malaysia's Sabah state on Borneo Island, which is a few hours away by speedboat from Sulu.