(Recasts with more detail, president's statement)

By Karen Lema

MANILA, April 20 (Reuters) - Filipinos recoiled in disgust and the military stepped up its offensive on Friday after Muslim militants decapitated seven labourers and sent their heads to army bases.

Local television showed soldiers laying banana leaves over the headless corpses, lying on the back of a pickup truck. The youngest victim was a 16-year-old boy who had got a summer job on Jolo to fund a college course.

The military suspects the Abu Sayyaf may have beheaded the road workers in retaliation for the killing by troops of more than 70 of its members, including two top leaders, in an eight-month U.S.-backed campaign.

The armed forces have ordered their troops to step up operations against the Abu Sayyaf and members of regional terrorist network Jemaah Islamiah, who use the southern island of Jolo in the Sulu archipelago as a base to plot and train.

"The beheading of the seven captives in Sulu once again demonstrates the Abu Sayyaf's ruthlessness and only strengthens our resolve to neutralise them," President Gloria Macapagal Arroyo said in a statement.

"Abu Sayyaf's acts of terror will not go unpunished."

The military estimates that the Abu Sayyaf's core strength has been halved from around 400 fighters due to the operation.

"SCUM"

The Abu Sayyaf is the deadliest and most reviled of three key Islamic rebel groups in the Philippines, a mainly Catholic country with a large Muslim minority in the south.

Manila has agreed truces with the two larger groups, who seek more autonomy for their followers, but has sworn to destroy the Abu Sayyaf.

In the southern city of Cotabato, Aleem Sharif Jul Aberin, the mufti of the Sulu archipelago, said decapitating people defied reason and religion.

In Manila, people said the military should storm the Abu Sayyaf's hideouts.

"These people have no place in this world. They are the scum of the earth. They should be the one's killed not innocent people," said Francisco Layug, 42, a taxi driver in the capital.

The small group, which gained international notoriety for capturing and beheading tourists and church workers around five years ago, carried out the Philippines' worst terrorist attack, the bombing of a ferry near Manila in 2004 that killed more than 100 people.

Washington is also keen to root out the Abu Sayyaf because of its links with Jemaah Islamiah, which wants a Islamic superstate across Southeast Asia.

This week, the Abu Sayyaf demanded a 5 million peso ($105,000) payment for the release of six of the men, who were working on a government road project and taken at gunpoint from their truck on Monday. A seventh man was kidnapped earlier that day.

The wife of one of the men killed said one of the captors had called her on her husband's cellphone to apologise for what they were about to do.

Rubelyn delos Reyes, 35, pleaded for mercy.

"The saddest thing is that my eldest daughter Neslyn is celebrating her 15 birthday today, they are so cruel." (Additional reporting by Karen Lema)

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