Residents said the fighting lasted about seven hours and that the fighters hurled grenades and fired rockets at the police.

"The militants refused to surrender and opened fire on police, forcing us to retaliate," Abdullah Khan, a senior police officer in Mardan, said.

Police said they had recovered the bodies of three fighters and some suicide vests from the house. Two policemen were killed and one was wounded in the fighting, they said.

Border unrest

Mardan, a town 40km northeast of the provincial capital, Peshawar, has so far been largely free of the violence which has spread from remote tribal areas on the border - known for harbouring  members of al-Qaeda and the Taliban.

On Friday a suicide bomber rammed his explosives-laden car into a security force checkpoint in North Waziristan's tribal region on the Afghan border, killing at least six people.

That attack came hours after US officials said that Abu Laith al-Libi, a senior al-Qaeda leader, was killed in the same region this week.

The killing of al-Libi, described by Pakistani intelligence officials as al-Qaeda's operational commander in the border region, is a boost for the US in its battle against the group.

Al-Libi was killed by a missile apparently fired from a US drone.