(Recasts with Philippines' chief peace negotiator)

By Manny Mogato and Jalil Hamid

MANILA/KUALA LUMPUR, Oct 3 (Reuters) - The Philippines hopes Malaysian troops monitoring its truce with Muslim separatist rebels will stay on until August 2008, as officials from both countries played down reports Malaysia was ready to quit.

A Malaysian government source told Reuters on Wednesday that Kuala Lumpur had not threatened to pull out, but was pushing for progress in stalled peace talks between the Philippine government and the Moro Islamic Liberation Front (MILF).

However, he only talked of an agreed three-month extension for the International Monitoring Team (IMT) until the end of November. The Philippine government and MILF both want a year's extension of the initial term that ended on Aug. 31. "We did not threaten, just reminding both that the IMT's extension is just for three months only," the source, who was close to the talks, told Reuters.

Rodolfo Garcia, Manila's chief peace negotiator, told Reuters he thought the 60 Malaysian troops would stay on until the middle of next year because the peace talks were edging forward.

"We've made some little progress and we continued to narrow the gaps," Garcia said in a phone interview, disputing reports that Malaysia was getting impatient.

"We're doing our homework and I hope the Malaysian officials facilitating our talks could see how far we have gone since the resumption of peace negotiations four years ago."

Garcia said another round of informal talks may be held next week to convince the Malaysians that progress is being made to end the nearly 40 years of conflict that has killed 120,000 people in the mainly Catholic country.

Tension has risen lately between the Philippine army and the MILF, with each side accusing the other of breaking a ceasefire during a skirmish on the island of Basilan last week.

Philippine sources said on Tuesday that Malaysia had threatened during an informal meeting in Kuala Lumpur last week to recall its 60 monitors from the southern Philippine region of Mindanao to pressure the two sides to resume talks.

Unarmed Malaysian soldiers have been in Mindanao since 2004 as part of an effort to end nearly 40 years of conflict that has killed more than 120,000 people and displaced 2 million. Libya and Brunei also have small contingents in the monitoring team.

Mindanao has been a focus of international attention because Western governments believe it has been a training base for Islamic militants with links to al Qaeda and regional group Jemaah Islamiah.

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