Fierce fighting is going on between Pakistani troops and pro-Taleban militants near the Afghan border.
About 200 troops went into the town of Loi Sam in the Bajaur tribal area on Thursday after clashes with insurgents.
Seven soldiers and 30 rebels have been killed, the army says. It denies troops have been surrounded or taken hostage.
The militants say only four of their fighters have been killed while 60 soldiers have died. Neither claim has been independently verified.
Talks between Pakistan's new government and Taleban leaders broke down in June.
Security has deteriorated sharply in recent weeks along the frontier, which the Afghan government and Nato say is a haven for al-Qaeda and Taleban militants.
Witnesses say bodies of soldiers and militants are lying on the streets of Loi Sam. Neither side has been able to recover them due to the heavy fighting going on.
Helicopter gunships and artillery pieces positioned in a paramilitary camp in Khar, the headquarters of Bajaur, are continuing to pound militant positions around Loi Sam.
Clashes erupted when troops reoccupied a border post
Unconfirmed reports say the soldiers are surrounded in the town and about 20 have been captured.
One soldier told the BBC Urdu service by telepone that a number of troops had been taken hostage by the Taleban insurgents.
"One of my men was killed on the spot when the Taleban attacked us, while four went missing. The rest of us laid down our arms and were captured," said the man, who identified himself as Subedar Ghausuddin.
Separately, Taleban militants have killed three people after accusing them of spying in Bajaur, officials and witnesses said.
Two men were beheaded and a third was shot dead. Their bodies were found on a road with notes saying they were spying on the Taleban.
Residents said a Taleban leader in Bajaur, Maulvi Faqir Mohammad, had warned locals over the radio not to leave the area.
He said anyone found to have passed any information about Taleban to the government would be beheaded.
There is mounting US pressure on the Pakistani government to crack down on militants using the border region to launch cross-border raids into Afghanistan.