Around 1,300 residents were being held hostage by a two-dozen strong group that authorities said was part of the Free Papua Movement (OPM), which has been fighting a long-running insurgency marked by periodic bouts of violence.
Villagers have been prevented from entering or leaving their small communities for two days, but have so far not been harmed, authorities said, as some 700 heavily armed Indonesian military personnel kept an eye on the situation.
"These people are from a criminal group that commit violence and intimidation -- what they want is war," local police chief Victor Dean Macbon told AFP.
"For now we are prioritising pre-emptive and preventive measures. We still have not forced our way in because we don't want the villagers to be victimised," he added.
The villages sit near US firm Freeport-McMoRan's mine where there have been a string of recent shootings including one in late October that left a policeman dead.
Papua has faced a low-level insurgency since it was annexed by Indonesia in the late sixties, with Freeport's mine frequently a flashpoint in the struggle for independence and a bigger share of the region's rich resources.
Jakarta has long kept a tight grip on the region with a heavy military and police presence.
Officers said Friday they have been communicating with local religious and community leaders in a bid to end the standoff.
Suryadi Diaz, a spokesman for the Papua police force, said the group is trying to disrupt activities at the nearby mine and had demanded that police not intervene.
But it was not immediately clear if the group had communicated any other specific demands.
Indonesian military chief Gatot Nurmantyo warned that the military was ready to end the hostage situation in a "hard" way if negotiations collapsed.
"Currently (the Indonesian military) is monitoring and observing because those who are held hostage by Free Papua Movement are civilians. We should handle this cautiously," Nurmantyo said in a statement.
Freeport spokesman Riza Pratama said the group has not made any demands to the company and that production was so far unaffected.
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