Militants are threatening to kill their remaining captives after Algerian troops launched a deadly assault on the gas complex besieged by the Islamists.
There was no official word from Algiers, but Britain, France and Norway confirmed an operation was under way at the remote desert site near the Libyan border, attacked in retaliation for a week-old military campaign against Islamist rebels in neighbouring Mali.
'Warplanes and ground units have begun an operation to take the complex by force,' one of the kidnappers told Mauritanian news agency ANI, threatening to 'kill all the hostages if the Algerian forces succeed in entering the complex'.
The kidnappers claimed an army air strike killed 34 hostages and 15 Islamists.
A foreign diplomat in Algiers confirmed the rescue mission 'did not go too well for the hostages', adding the operations were ongoing.
Algeria's APS news agency, citing local sources, said an unspecified number of people were killed in the rescue attempt.
APS reported nearly 600 Algerian workers and four foreign hostages - two from Britain, one from France and one from Kenya - were freed during the operation. The Irish government also reported one of its nationals was freed.
And 15 foreigners and 30 Algerian hostages earlier managed to escape from the In Amenas plant, jointly operated by British oil giant BP, Norway's Statoil and state-run Algerian energy firm Sonatrach, Algerian media reported.
BP said it was evacuating a group of non-essential workers from the country.
The Islamist gunmen launched their attack on Wednesday morning, killing two people including one Briton, and taking scores of Algerians and 41 foreigners hostage, among them American, British, French, Irish, Norwegian and Japanese citizens.
Veteran Islamist fighter Mokhtar Belmokhtar, an Algerian jihadist with al-Qaeda ties, has claimed responsibility for launching the attack.
Belmokhtar, dubbed 'The Uncatchable' by French intelligence and 'Mister Marlboro' for his illicit cigarette smuggling, was until recently one of the leaders of al-Qaeda in the Islamic Maghreb (AQIM).
But he was pushed out of the group towards the end of last year and set up a group called 'Signatories for Blood'. He has been blamed for previous abductions and the killings of both Algerians and foreigners.
The chief hostage taker on the ground, Abu al-Baraa, was reported killed in the Algerian operation by ANI, which often carries reliable reports from al-Qaeda-linked groups.
'We demand the Algerian army pull out from the area to allow negotiations', Abu al-Baraa had earlier told Al-Jazeera news channel.
Algeria has insisted it would not negotiate with 'terrorists'.
The fast-moving hostage drama dragged Algiers and several top Western powers into the Mali conflict, taking the spotlight off French and government troops battling the Islamists controlling the country's vast desert north.
The UN special envoy for the Sahel, Romano Prodi, said that the French air and ground intervention in Mali was the only way to stop Islamists creating 'a terrorist safe haven in the heart of Africa'.
In Brussels, French Foreign Minister Laurent Fabius said EU countries may provide troops to help France in its former west African colony.
On Thursday, more French troops poured into the impoverished country, boosting their number to 1400, the defence minister said. At full strength the force will reach 2500 soldiers.
Contingents from Chad, Togo and Nigeria for an African force set to reach over 5000 troops in Mali were making their way to the country.