The guerrillas suddenly released 225 foreign hostages late on Sunday night, including Britain's deputy ambassador, Roger Church, and a British businessman, David Griffith, in what they called a goodwill gesture for Christmas.
But a communique from the Tupac Amaru Revolutionary Movement (MRTA) leader, Nestor Cerpa, showed no sign that the rebels were backing down. He said the remaining hostages would be released only if President Alberto Fujimori released several hundred Tupac Amaru prisoners from jail. Mr Fujimori has been adamant he will never do so.
Opinions were divided here as to whether releasing most of the foreigners made a military assault on the building more or less likely. Some Peruvians expressed concern that foreign television networks immediately started pulling out after their nationals were freed.
Mr Fujimori has threatened an assault if the guerrillas do not lay down their arms, but has been under heavy international pressure not to do so.
The fact that the guerrillas retained Japanese diplomats and businessmen was widely seen here as part of their efforts to extort a "war tax" - a cash ransom from wealthy Japanese corporations whose executives are still held. After releasing "those not linked to the Peruvian government", holding the Japanese businessmen made no sense other than for money, several diplomats said.
Peruvian police claimed yesterday that the Tupac Amaru guerrillas, before the Lima siege, routinely earned more than $1m a year from ransoms through kidnappings.
It was a dramatic scene on Sunday night as the foreign hostages began appearing, boarded buses and gazed or waved at hundreds of journalists, television lights and flashing cameras.
To fit on to six buses for the trip to a police hospital for a medical check, many were forced to stand in the aisles. But for the crumpled dark evening suits they had worn to attend a Christmas cocktail party, they could have been weary Peruvians returning from work.
Some looked exhausted, confused and unshaven. Others smiled and gave victory signs. Some still wore ties. Others wore sports shirts provided by Red Cross workers.
On the first bus was Mr Church, Britain's Deputy Chief of Mission, who spent 122 hours as a hostage. His boss, the British ambassador, had left the party just before the guerrilla assault.
Appearing on the steps of the British embassy building yesterday, Mr Church, 50, said: "I've had some very difficult days. But I'm just glad to be reunited with my family at Christmas.
"Obviously, my thoughts are with those still held captive and I hope the situation will be resolved very rapidly.
"At no time were we mistreated. They treated us as well as could be expected. I hope the situation is going to be resolved through negotiations. I believe the Peruvian government is prepared to negotiate. There is not going to be a violent solution to this."
He added: "Originally, their [the guerrillas'] demands were very clear - the release of 400 prisoners. It seems to me that particular demand has been reduced somewhat." That remark appeared to contradict the guerrillas' own communique.
Mr Griffith, born and raised in Peru and holding dual nationality, is general manager of the well-known Hotel Las Americas in Lima. He did not immediately speak to the media.
All seven American hostages - three diplomats and four US Agency for International Development employees - were also among those freed.Reuse content