They had threatened to kill all the hostages and then themselves, after a daring assault on a diplomatic Christmas party at the Japanese ambassador's residence in Lima's wealthy San Isidro district.
The 20 or so masked guerrillas of the Tupac Amaru Liberation Movement (MRTA) apparently fired a rocket at the building and stormed over its back wall, while others masquerading as waiters produced weapons from cases of champagne. The guerrillas were demanding the release of up to 500 group members and said they would start the killing with Peru's Foreign Minister, Francisco Tudela, if President Alberto Fujimori did not personally hear their demands.
A first deadline for killing Mr Tudela at 20 minutes after midday (5.20pm GMT) yesterday, passed without incident.
"We are clear. The liberation of all our comrades, or we die with the all the hostages," one rebel told a local radio station by phone.
Another described the hostages as prisoners of war. They said they had planted explosives around the inside perimiter of the residence's gardens to discourage a military rescue attempt.
Early today food was taken in and the rebels and hostages, held in groups in various salons, bedrooms and even bathrooms, settled in for a second night. Foreign governments urged Mr Fujimori, known for his tough line against guerrillas, not to contemplate a military assault. Spanish Prime Minister Jose Maria Aznar said an attack would lead to a "massacre". At the same time, there were unconfirmed reports that anti-terrorist commandos in several countries were on stand-by to fly to Lima.
As well as seeking the freedom of members, the guerrillas were demanding transport for themselves and the freed prisoner to a jungle hideout, an unspecified "war tax" - presumably a large sum of cash - and a reversal of Mr Fujimori"s free market economic policies.
Britain's ambassador, John Illman, had just left the reception but his number two, Roger Church, 50, was held. Two hostages and a guerrilla were reported to have been wounded.
A Financial Times correspondent, Sally Bowen, a Briton, was at the party but was released soon after the assault, along with other women guests, said to include Mr Fujimori's mother and sister.
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