Local officials put the number of dead at up to 160, most of them Christians, and say the figure is expected to rise.
The warning comes after some of the worst violence in the islands in more than 18 months of clashes.
Military spokesman Air Marshall Graito Vsodo has confirmed to the BBC that more than 100 people have been killed in the latest clashes between Christians and Muslims on the island of Halmahera, about 2,600km (1,700 miles) northeast of Jakarta.
Local officials put the number of dead at up to 160, most of them Christians, and say the figure is expected to rise.
About 300 homes are also thought to have been destroyed in the fighting.
Air Marshall Graito said security forces were trying to provide a buffer between the sides, but he said the soldiers are outnumbered.
He said it was impossible to stop the fighting without the agreement of local people.
The statement comes in response to mounting criticism of the military, which has been accused of standing by and failing to take action to halt the violence.
A BBC correspondent in the region says many Indonesians believe the military is not only turning a blind eye to the Muslim militants, but may be arming them as well.
'Economic pressures'
A foreign ministry spokesman says the government is trying to get reconciliation between the two sides, blaming economic pressures for the violence.
However there is strong evidence that religious distinctions are a key factor in the tension and there is a risk of the violence spreading.
Halmahera has been the scene of some of the bloodiest clashes between Muslims and Christians in recent months.
Military officials said an unknown number of women and children had been kidnapped.
The authorities have so far declined to say who the warring parties were, but local sources say gangs of Muslim militants attacked the Christian inhabitants of Duma.
Church firebombed
One woman from a Christian crisis centre in a neighbouring district said Muslims armed with machetes had attacked some 200 Christians taking refuge in a church in the village.
"They bombed the church and burned it down," she told Reuters, quoting witnesses who had managed to escape.
Indonesia is predominantly Muslim, but the Moluccas, or Spice Islands, have a majority Christian population.
Thousands have been killed in the region since January 1999, when sectarian fighting broke out between the two communities amid a breakdown of law and order following the downfall of former President Suharto.
At first, local Christians tried to drive out Muslim immigrants.
The recent upsurge in violence has been blamed on the extremist Lashkar Jihad Muslim militant group which has said it plans to wage a "jihad" or holy war against the Christian community.
About 2,000 of its members, some armed with automatic weapons, are believed to have arrived in the Moluccas since May.