Police earlier said that about 30 children and teachers were being held at the school by five or six armed men.
 
Kamal Hyder, Al Jazeera's correspondent in Islamabad, said details were still emerging of the hostage situation.
 
"We are told that there at least least half a dozen men with rocket-propelled grenades [inside the school]," he said.
 
"There are also reports that special forces have been deployed to solve this as soon as possible."
 
Health worker abducted
 
Local police said the men had holed up at the school after they abducted a health worker.

Police pursued them and one man was killed in an ensuing shootout, Shakirullah, a police official, said.

One police officer was injured in the gun battle while the medic escaped, he said.

"They have taken the school children hostage, we don't know how many but we think it is in dozens," Shakirullah said.

"Officials are on the spot and conducting negotiations."

Heavy fighting

Also in the NWFP, authorities found the bodies of two decapitated policemen on Sunday night in the Swat valley, according to police.

Separately, the Pakistan military said heavy fighting was going on in two areas of South Waziristan on the Afghan border.

One soldier had been killed and nine wounded in the fighting on Monday, the military said.

More than 150 fighters and 20 soldiers have been killed in the South Waziristan fighting this month.

In neighbouring North Waziristan, two soldiers were killed in an attack on a checkpost, while three policemen were killed in another attack in the Orakzai tribal region on Sunday night, intelligence officials said.

Pakistani troops have battled to assume control of the regions bordering Afghanistan, where fighters loyal to the Taliban and al-Qaeda are situated.