The ITAR-Tass news agency reported 646 people were hospitalised, including 332 children, in the latest soft-target attack blamed on Chechen separatists and their allies in more than a decade of violence.

Hours after the midday assault, three of the separatist rebels were reportedly still blockaded in a school basement, trading fire with security forces. A Federal Security Service official said militants were still holding hostages children among them.

The school was largely secured late Friday afternoon, but a large explosion erupted from inside toward nightfall, the ITAR-Tass news agency reported. Soon after, the crisis operations centre said fighting had ended in the basement but that two militants may still be at large.

Twenty militants were killed, including 10 Arabs, said Valery Andreyev, the top Federal Security Service official in the region. Channel One TV reported late Friday that three of the attackers were arrested after trying to escape in civilian dress. A member of an elite security unit died saving two young girls, ITAR-Tass reported.

The hostage-takers had been from the school.

Fleeing children rushed past armored personnel carriers that hid heavily armed soldiers firing at the building from which they escaped.

"They are alive! They are alive! They are alive!" screamed rescuers to parents as they carried out wounded and shocked children.

Russian media said most of the children had survived, but about 400 local residents and former hostages were taken to hospitals in the area after being injured, Inferfax reported.

One hundred and fifty-eight children are among those hospitalised in the southern town of Beslan, a source close to the regional president told Moscow Echo radio.

Russian President Vladimir Putin had vowed the hostage's safety was his top priority and the security services said the sudden assault on the school had not been planned.

"I want to point out that we had not planned any kind of armed action. We offered the continuation of the ongoing talks to peacefully release the hostages," said the FSB regional head, Valery Andreyev.

He said the chain of events was triggered when two powerful explosions went off around the school building at around 1:00 pm (0900 GMT).

"The bandits opened intensive fire at the fleeing adults and children. To preserve the lives of the hostages, fire was opened in reply on the bandits. Locals with weapons also started to fire at the bandits. This did not allow effective conditions for the special forces," Andreyev said.

"They were shooting at us from the roof," said one child, recalling how the hostage-takers opened fire on kids who were trying to escape their captors amid the blasts that opened an escape route.

"No, they were shooting from the second floor," corrected a child who looked no older than six.

Hostages said they had not been given any food or water during their ordeal. One naked boy said: "We drank urine."

The gunmen had reportedly mined the school's grounds, and at one point threatened to kill 50 children for every one of their number killed. Chechen separatists have been waging a decade-long war for independence from Russian rule.

Parents had maintained an agonising round-the-clock vigil outside the school since Wednesday, the first day of the new school year and traditionally a day of festivities and celebrations in Russia.

Russian special forces were Friday looking for 13 of the gunmen, ITAR-TASS reported, citing the regional interior ministry, as other reports said five of the hostage-takers were dead. Neighbouring Ingushetia shut its borders to prevent the fugitives slipping away.

European leaders were among the first to express regret at the bloody outcome of the Russian hostage crisis, calling it a "deep human tragedy," but accepted the "dilemma" facing the Russian authorities.

The United Nations had met in emergency session on Wednesday as the crisis erupted, calling for the immediate release of the children.

The hostage-taking was the fourth attack blamed on Chechen rebels to rock Russia since last week.

Those have included a bomb at a bus station on August 24, bomb attacks that brought down two airliners the next day and killed 90 people and an attack by a female suicide bomber outside a Moscow subway on Tuesday that left nine dead and 51 people wounded.