ZAMBOANGA, Philippines, December 10, 2009 (AFP) - Security forces scoured jungle in the southern Philippines Thursday for two factory workers held by Al Qaeda-linked militants, after the severed head of one hostage was dumped in a park.

Police and soldiers stepped up their search on the southern island of Basilan, but the Abu Sayyaf militants had so far eluded the dragnet, provincial police chief Superintendent Abubakar Tulawie said.

"We have been on their trail, but whenever we arrive at the site where they are last reported, they are already gone," Tulawie told reporters.

Heavily armed gunmen from the Abu Sayyaf, listed by the United States as a terrorist organisation, kidnapped three workers from Hitech Wood Craft Corp. in Basilan's Maluso town on November 10.

The Abu Sayyaf, which specialises in kidnappings for ransom, had demanded P1.5 million ($32,500) for the release of the trio, Tulawei said.

On Wednesday, the severed head of one of the hostages, Mark Singson, aged in his 20s, was found stuffed in a plastic bag after being dumped in a park on the island.

Residents had alerted police after fearing the package was a bomb.

Tulawei said the other two hostages -- Michael Tan, 27 and Oscar Lu, 51 -- were known to be alive as of Wednesday because they had been allowed to call their employer then.

Michael Tan is the son-in-law of the factory owner George Tan, who police said had ignored their warnings not to negotiate with the Abu Sayyaf.

Tulawie said the Abu Sayyaf made contact with the factory owner on Sunday to relay the ransom demand, giving him two days to raise the funds. The elder Tan failed to raise the money on time.

"They texted George Tan to pick up Singson's severed head last night," Tulawie said.

Al Rasheed Sakalahul, the island province's vice governor, said the factory owner had repeatedly refused to cooperate with authorities.

Founded in the early 1990s with seed money from Osama bin Laden's Al Qaeda network, the Abu Sayyaf or "Bearers of the Sword" initially fought for an independent Islamic state in the southern Philippines.

It later morphed into a criminal organisation specialising in bombings and kidnappings targeting businessmen and foreign missionaries.

The group is blamed for the deaths of two American hostages snatched from an island getaway in 2001, as well the nation's worst terror attack -- the bombing of a ferry in Manila Bay in 2004 that claimed more than 100 lives.

US special forces have been rotating in small numbers in the south since 2001 to train Filipino soldiers in combating the Abu Sayyaf.

The assistance has led to the capture or deaths of many Abu Sayyaf leaders and the group's numbers are believed to have fallen to 300-400 gunmen, down from a high of about 1,000 in the 1990s.

But it remains well entrenched in the jungles of Basilan and nearby Jolo island, thanks to support from local Muslim communities and its ability to attract fresh recruits from poor young men lured by promises of money.

The Abu Sayyaf was blamed for the beheading of a school principal on Jolo last month, just days before US Secretary of State Hillary Clinton arrived in Manila to affirm security ties.

In September, two US soldiers were killed in a roadside bomb on Jolo in the deadliest attack on American forces so far by the militant group.

Abu Sayyaf attacks have left at least 48 Filipino soldiers and 70 insurgents dead since January, according to an AFP tally based on military reports.