Sources close to the President said he had received advice from the United States and other foreign military advisers on how best to carry out an assault. But the sources stressed an assault was "only one option, a serious one, but the President is still hoping for a peaceful solution".
Peruvian commandos have been practising an assault on a mock-up of the Japanese diplomatic compound at a secret location, the sources said. They said an assault would probably last only three minutes if it was successful but that casualties among the hostages would be high.
In only his second statement since the crisis began on 17 December, Mr Fujimori yesterday described the hostage drama as an isolated incident and sought to soothe investors' concerns. Showing no sign of backing down on the guerrillas' demands for the release of 400 jailed comrades, he again described the guerrillas as "terrorists", something they have angrily denied.
The 20 or so guerrillas of the Tupac Amaru RevolutionMovement (MRTA) freed a further seven hostages on new year's day, leaving them with 74 captives including the President's brother Pedro, cabinet ministers, senior police and military officers, congressmen, two ambassadors and Peruvian and Japanese businessmen.
The freed men were four Japanese businessmen and three Peruvian government officials, including Juan Assereto, a key adviser to the President on privatising state industries.
The seven walked out with one of Peru's leading Catholic churchmen, Bishop Juan Luis Cipriani of Ayacucho. Although he has said his visits to the building were pastoral, he appears to have won the release of many of the nearly 500 hostages freed over the past two weeks.
Despite the latest release, there was no sign of an early end to the 16-day-old occupation which began when the rebels stormed a diplomatic cocktail party. The MRTA yesterday issued a statement saying the ball was now in Mr Fujimori's court.
"We call on all the progressive men and women of the world to keep demanding that the Peruvian government come to a peaceful solution that will lead to the freedom of the political prisoners and the prisoners of war [the hostages] taken by our commando unit," said the statement, datelined "somewhere in the central jungle". "Now it is the Peruvian government's turn to speak."
Mr Fujimori was said to have been particularly angered by an impromptu press conference given by MRTA leader, Nestor Cerpa, inside the building on new year's eve.
A group of reporters had been allowed through police cordons to film the door of the residence when a Japanese photographer broke from the group and approached the building holding up a sign saying "Kyodo", the name of his Japanese news agency.
The other journalists followed and Cerpa, his face covered by a bandanna, held a news conference, haranguing Mr Fujimori's "dictatorship".