Philippines troops found bundles of banknotes and cheques worth about $US1.6 million abandoned by Islamist militants holed up in Marawi City, a discovery the military said on Tuesday was evidence that the fighters were pulling back.

Fighters linked to Islamic State have been cornered in a built-up sliver of the southern lakeside town after two weeks of intense combat. The military said that over the past 24 hours it had taken several buildings that had been defended by snipers.

In one house they found a vault loaded with neat stacks of money worth 52.2 million pesos ($US1.06 million) and cheques made out for cash worth 27 million pesos ($US550,000).

"The recovery of those millions of cash indicates that they are running because the government troops are pressing in and focusing on destroying them," Marines Operations Officer Rowan Rimas told a news conference in the town as helicopters on machinegun runs buzzed overhead.

Black smoke poured from an area near one of the town's mosques and the lake after bombings by OV-10 attack aircraft and artillery fire from the ground.

The battle for Marawi has raised concerns that the ultra-radical Islamic State, on a back foot in Syria and Iraq, is building a regional base on the Philippine island of Mindanao.

Officials said that, among the several hundred militants who seized the town on May 23, there were about 40 foreigners from neighbouring Indonesia and Malaysia but also from India, Saudi Arabia, Morocco and Chechnya.

The fighters prepared for a long siege, stockpiling arms and food in tunnels, basements, mosques and madrassas, or Islamic religious schools, military officials say. The Philippines is largely Christian, but Marawi City is overwhelmingly Muslim.

Progress in the military campaign has been slow because hundreds of civilians are still trapped or being held hostage in the urban heart of the town, officials have said.

"In a few days, we will we will be able to get everything, we will be able to clear the entire Marawi City," armed forces Chief of Staff General Eduaro Año said in a radio interview.

Fighting erupted in Marawi after a bungled raid aimed at capturing Isnilon Hapilon, whom Islamic State proclaimed as its "emir" of Southeast Asia last year after he pledged allegiance to the group. The US State Department has offered a bounty of up to $US5 million for his arrest.

President Rodrigo Duterte this week offered a bounty of about $US200,000 to anyone who "neutralised" Hapilon, and the equivalent of about $100,000 for each of the two leaders of the Maute group, one of four factions that banded together to take the town.

Año said an estimated 100 Maute militants were holding out, and the military was checking on a report that one of its founding leaders, Omar Maute, had been killed in an air strike.

Duterte, who launched a ruthless "war on drugs" after coming to power a year ago, has said the Marawi fighters were financed by drug lords in Mindanao, an island the size of South Korea that has suffered for decades from banditry and insurgencies.

Jo-Ar Herrera, a military spokesman, said the discovery of the stash of banknotes and cheques was evidence that the militants had links to international terrorist groups. However, he said an investigation was needed to establish the facts.

It is possible that the money came from a bank that was raided on the first day of the siege. Herrera told Reuters last week that a branch of Landbank had been attacked and he had heard that one of its vaults was opened.